Common Formulas for Finance

[Zaheer Swati]

Finance is the allocation of assets and liabilities (cash) keeping in mind the time and risks. Calculating finance is not an easy task but it can be made easier if we have the required data and exact Finance Formulas as well tools. Finance cannot be enclosed in four to five formulas but some of important commonly used formulas are:

Future Value Formula:
Future value is the expected value that is estimated keeping in mind the current present value. Future value formula is used to calculate the future value of original cash flow in present. Future value helps know the worth difference between the present and future values of a cash flow. Future value is denoted by FV, present value is denoted by PV, time by t and interest by i. it is calculated by two methods by simple and compound interest formulas.
Simple interest: FV = PV (i) (t)
Compound interest: FV = PV (1+i) t

Present Value Formula:
Present value is also known as the discounted value, it tells us the worth of future amount of money in current currency rates with adjustments of interests and inflation. In short it is comparability of buying power of one rupee in future to its today’s purchasing power. It is denoted by PV.
PV = FV/ (1+r) n

Annuity Formulas:
Annuity is the agreed or fixed amount of money paid to someone each year. Dealing with annuity we have to face two problems, obtaining future and present worth of an annuity.

Future value of Annuity:
The future value of annuity is the fixed payments done each year in future. It tells about the future returns as well as discounts.
FVA =PMT [(1+i) n-1/i]
Where, FVA= future value of annuity
PMT= payment per period

Present Value of Annuity:
The present value of annuity is the future payment of an annuity in current value. The cash flows of future annuity are discounted at a discount rate.
PVA =PMT [(1+i) n -1 / (1+i) n]

Net Present Value:
It is the difference between the present values of inflows and outflows of cash over a time period. It is usually used by project managers to evaluate the profitability and capital budgeting of a project.
NPV = (∑n t=1 net cash flows t / (1+r)) – initial investments
Where, r = discounted rates

Perpetuity:
Perpetuity values are used to find the present value of a company’s future project cash flow and the company’s terminal value.
Perpetuity = cash flows / interest rate or yields

Inflation ratio:
This formula tells the level of inflation an economy is facing. It is simply done using the consumer price index (CPI).
Inflation% = current CPI – initial CPI/Current CPI (100)

Basic growth rate:
It tells us about the progress of economy keeping in view initial value and present values.
Basic growth rate =present value-initial value/initial value (100)
Average growth rate = [(present value/initial value) ½

[Zaheer Swati]

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