Putting it to good use
The calculations concerning the present and future value of money are valuable aids to financial decision-making. The following examples illustrate their practical application. Note that in all the examples, the interest rate is expressed as a proportion (e.g. 5% is entered as 0.05) and it is assumed that interest is compounded once a year. The sample spreadsheet for this chapter shows the formulas in use and includes some more complex examples.
Sinking funds
A situation might arise where you want to set aside a lump sum to replace a machine in five years’ time (although this might not be the best use of a cash surplus – see Chapter 19). For example, suppose you know that you will need to spend $50,000 in five years’ time, ...
Get The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
