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Cost of Capital^33

Future Value = (Investment or Present Value) * (1 + Interest) No. of time Periods

The compound values can be calculated on a yearly basis, or on a half-yearly basis, or
on a monthly basis or on continuous basis or on any other basis you may so desire. This
is because the formula takes into consideration a specific time period and the interest

rate for that time period only.

To calculate these values would be very tedious and would require scientific calculators.
To ease our jobs there are tables developed which can take care of the interest factor
calculations so that our formulas can be written as:

Future Value = (Investment or Present Value) * (Future Value Interest Factor n,i)

where n = no of time periods and i = is the interest rate.

Let us look at an example of how we calculate the future value:

Example

Rs 7000 are invested at 5% per annum compound interest compounded annually. What
will be the amount after 20 years?

Solution

Here i = 0.05, P = 7000, and n = 20. Putting it in the formula we get:

FV = 7000 x (1+0.05)20

FV = 7000 x 2.6533 = Rs 18573.1

We have taken a shortcut here. We looked at the future value of Rs 1 at the end of 20
years at 5% interest in the Future Value Interest Factor Table given at the end of this
book (i.e. find the value of Future Value Interest Factor n,i)and found the figure to be
2.6533 and then substituted the figure here to get the answer.

Another way of doing it would be to use a scientific calculator and calculate the value
that comes out to be the same.

A third way of doing this would be even more simple. Use a spreadsheet program. Let
us see how we use Microsoft Excel to do the same.

Step 1: Go to the Insert menu and choose function. You get a screen that looks like
this: