Interest Formulas
Future value of single cash flow.
Single Cash Accumulation - Future Value
The accumulated value of a present sum invested at a given interest rate after some time can be expressed as
F = P (1 + i)n (1)
where
F = accumulated value in the future- Future Value
P = principal or present sum invested
i = interest rate per period
n = number of interest periods
The factor "(1 + i)n" is known as the "single payment compound amount factor".
Example - Accumulated amount
An amount of 1000 is invested at interest rate 10% (0.1) per year for 10 years. The accumulated amount can be calculated like
F = 1000 (1 + 0.1)10
= 2594
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Present Value
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interest rate per period
Discounting Process - Present Value
The Present Value - or Present Worth - of a future cash flow can be calculated with the discounting process and is expressed like
P = F / (1 + i)n (2)
where
P = present value
F = future cash flow
i = discount rate or discounting factor
n = numbers of periods
The factor "1 / (1 + i)n" is known as the "single payment present worth factor".
Example - The present value of a future sum
A sum of 1000 is paid after 10 years. The discount rate is 10% (0.1) per year. The present value of the future payment can be calculated like
P = 1000 / (1 + 0.1)10
= 386
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Present Value
no. of periods
interest rate per period