Cash Flow DiagramsĪ Cash Flow Diagram can help you visualize a series of receipts (positive values) and disbursements (negative values) at discrete periods in time. With the use of calculators and spreadsheets, the table lookup technique is practically obsolete. In the past, it was common to refer to a discount factor table to look up the number needed to perform a time value of money conversion. To convert the future value to the equivalent present value, you simply multiple the future value by the discount factor. The discount formula can be written as P=F*(P/F,i%,n), where (P/F,i%,n) is the symbol used to define the discount factor. So, discounting is basically just the inverse of compounding: $P=$F*(1+i) -n. The discounting principle states that if we want to have $F in n years, we need to invest $P right now. The compounding principle states that if we have $P to invest now, the future value will increase to $F=$P*(1+i) n after n years, where i is the effective annual interest rate. Time value of money calculations are based on the principle that funds placed in a secure investment earn interest over time.
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