Table of Contents
Advertisement
In order to use the TVM equation, the cash flows (money received for
money paid) must meet the following requirements:
B The dollar amount is the same for each payment.
® The payments occur at regular intervals.
B Payment periods coincide with the compounding periods.
B Payments occur at the end of each period.
Sign Convention. The sign convention for TVM problems is:
B Money received is a positive value.
® Money paid out is a negative value.
Cash-Flow Diagrams. It is helpful to illustrate TVM calculations
with cash flow diagrams. Cash flow diagrams are time lines divided
into payment periods or compounding periods. Arrows show the cash
flows, pointing up for positive cash flows and down for negative cash
flows.
The cash flow diagram for a transaction depends on the point of view
of the problem. For example, a loan is an initial positive cash flow for
the borrower and an initial negative cash flow for the lender.
B
(Loan)
Money received
is a positive
'
number
Equal periods
S
'
2
¢
3
i
4
¢
5
p
Money paid out
P
P
P
P
F
is a negative
.
.
J
number
Equal payments
Figure 7-1. Loan From a Borrower's Point of View
110
7: The Equation Library
Advertisement
Table of Contents
