Appendix II: Compound Interest and the Concept of Present Value


Calculate the interest for another year taking principal amount as $550 that is calculated in the first year as follows: img img img If we deduct the principal amount of $500 and simple interest of $100 on $500 for 2 years, we get $5(50 × 10%) as compound interest which is nothing but interest on interest.

To Compute the Future Value of Number the Following Formula is used: img Where n is the Number of Years, r is the Rate of Interest, and p is the Principal Amount The formula gives future value of Cash Flow img after n years when the Rate of Interest is r.

Present value:- Present value can be defined as "the value of series of cash flows at the end of next year at a given rate of discount". img Where, r = rate of interest n = number of years img = Present value of cash flow. Example:- Find the present value of img to be required after 5 years if the interest rate is img Substituting the given data in the above formula img img