The present value of a sum to be received in the future is just the amount you would have to invest now to equal it. Similarly the future value of a sum you have now is just the amount it will grow to by the action of compound interest.
That is: FV=PV*(1+I)^ and PV=FV/(1+I)^n
The present value is a good way of judging the worth of a sum that becomes available in the future because it measures its effective value in today's terms.
Inflation alters the purchasing power of the present and future value but not their relative monetary value.
Inflation increases the true interest rate to the quoted market rate.
The net present value NPV is just the sum of the present values of each item in the cashflow.
The net future value NFV is the sum of the future values of each term in the cashflow.
The NPV and NFV are always related by the formula NFV=NPV*(1+I)^n
The NPV and NFV of a regular cashflow are identical to the PV and FV worked out in Chapter 4 in connection with the savings plan.
In the case of the annuity and repayment loan the result that you get is different if you take the initial payment into account. In this case the cashflow isn’t regular and the NPV and NFV are both zero.
Spreadsheets take the hard work out of calculations, but you still need to know how to do them. Financial Functions with a spreadsheet is all about understanding and reasoning, using a spreadsheet to do the actual calculation.
Understanding Percentages Percentages are something familiar to us all - but they present many pitfalls that need to be avoided.
Interest Simple and Compound We explore the idea of borrowing money for a specified rate of interest or earning interest on an investment. The ideas of Present and Future Value PV and FV are introduced.
Effective Interest Rates We explore the idea of the `effective’ annual interest rate and then on to the Effective Interest Rate/Annual Percentage Rate, the much quoted EIR or APR.
Introduction to Cashflow - Savings Plans In the first of three chapters covering the way in which interest rate affects cashflow we explore savings - but first we introduce some general ideas that apply equally to annuities and repayment loans.
Exploring Repayment Loans Repayment loans are the subject of the last of three chapters which look at the effects of regular cashflows.
Present and Future Values The principles of present and future value apply even if the cash flow is irregular. The calculations are just a matter of breaking down the cash flow calculations into simple steps.
Investment analysis How is it possible to evaluate investments that generate irregular cashflows? We explore how NPV can be used to make investment decisions.
IRR The Internal Rate of Return The IRR is perhaps the most complicated of the measures of the value of an investment with an irregular cash flow. Understanding exactly what it means is a good step toward making correct use of it.