ECO 1192 Chapter Notes - Chapter 3: Sinking Fund, Cash Flow
30 Sep 2016
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Document Summary
We know that interest is used to determine whether different patterns of cash flows are equivalent. Compound interest factors are used to compare and evaluate cash flows. It"s incredibly important to understand compound interest factors because they will be used consistently throughout the rest of the course. Cash flows are too irregular, complex, and tedious to calculate individually. Compound interest factors are formulas that define mathematical equivalence for specific types of common cash flow patterns. There are four different types of cash flows that are typically seen: (i) Disbursement = cash outflow, receipt = cash inflow (ii) Equal flows (disbursements or receipts) after each period (iii) Each period, a constant amount is added or subtracted from one period to the next ie. p1=100, p2=150, p3=200, p4=250, p5=300, etc. Difference between adjacent periods will always be a constant amount. Could also be decreasing at a constant rate (iv)
