TIME VALUE OF MONEY

FUTURE VALUE OF A SINGLE CASH FLOW

FVn = PV(1+k)n

FVn = Future value of the initial flow after n years

PV = Initial cash flow
k = r/100, where
Doubling Period
Rule of 72 = 72/r
Rule of 69 = 0.35+69/r
Shorter compounding period
FVn =PV(1+k/m)mxn
Effective vs. Nominal Rate of Interest
r =(1+k/m)m-1 where m = frequency of compounding
r = effective rate of interest
FUTURE VALUE OF UNEVEN MULTIPLE FLOWS
FV = A1(1+k)n+A2(1+k)n-1+A3(1+k)n-2+… … …+An(1+k)1
FUTURE VALUE OF AN ANNUITY
FVAn = A [(1+k)n-1]
k
Therefore A= FVAn x k/[(1+k)n-1]
k/[(1+k)n-1] is called Sinking Fund Factor
PRESENT VALUE OF A SINGLE CASH FLOW
PV = FVn
(1+k)n
PRESENT VALUE OF UNEVEN MULTIPLE FLOWS
PV = A1/(1+k) +A2/(1+k)2 +A3/(1+k)3 + … … … +An/(1+k)n
PRESENT VALUE OF AN ANNUITY
PVAn = A x [ (1+k)n-1 ]
k(1+k)n

Therefore A = PVAn [ k(1+k)n ]

(1+k)n-1

[ k(1+k)n ] is called Capital Recovery Factor

(1+k)n-1

PRESENT VALUE OF A PERPETUITY

PV = A/K