Foundations of Computational Finance With MATLAB by McCarthy Ed

Author:McCarthy, Ed [McCarthy, Ed]
Language: eng
Format: azw3
Tags: Corporate Finance, Business & Economics, General
ISBN: 9781119433873
Publisher: Wiley
Published: 2018-05-29T04:00:00+00:00

5.2.1 Future Value with Single Cash Flows

We regularly encounter future value calculations. For example, if you invest an amount and it grows by 6 percent each year, what will the account be worth in 15 years? If you're projecting that a new service from your company will experience sales growth of 20 percent annually for the next five years, what is the forecasted income in year five?

The goal in each case is to calculate a future amount given a set of known and assumed variables. These inputs allow us to calculate future values (FV) using several formulas:

Present value: An initial amount in today's dollars, designated as PV or P for principal

Payments or deposits: A cash flow or deposit amount, CF(t) for cash flow at time t or PMT(t) for payment at time t. Receipts are often designated as positive numbers and payments as negative (i.e., outgoing) amounts.

Time: The amount of time between present and future valuation dates. The variable t is used in compounding to denote measurements in years.

Number of periods: The number of compound interest periods, payments or cash flows, denoted by n.

Interest or discount rates: Denoted by r or i, usually stated annually and adjusted for the number of periods. Also called the nominal rate.

Interest amount earned: Stated as a currency amount, I.

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