Future Value
The term Compound Interest merely implies that interest paid (earned) on a loan (an investment) is periodically added to the principal. Consequently, interest is earned on the interest as well as the Principal or Original Amount. This interest-on-interest is compounding.
FV1 = PV (1 + r)
FV2 = FV1 (1 + r) = PV (1 + r) (1 + r) = PV (1 + r)2
FVn = PV (1 + r)n
For the compounding factor (1 + r)n for Re.1, compound interest tables or Future Value Interest Factor (FVIFn or terminal value interest factor) tables are designed.
FVn = PV (FVIFrn)
Present (or Discounted) Value
Present Value of future cash flows allows us to place all cash flows on a current footing and enables to compare them in terms of present rupees
FVn
PV = ————or FVn [ 1 / (1 + r)n]
(1 + r)n
The component [ 1 / (1 + r)n] is the Present Value Interest
Factor (PVIFrn) and the reciprocal of the Future Value Interest Factor (FVIFrn)
PV = FVn (PVIFrn)
