In many situations, a single disbursement or receipt is an appropriate model of cash flows. For example, the salvage value of production equipment with a limited service life will be a single receipt at some future date. An investment today to be redeemed at some future date is another example.
Figure 3.1 illustrates the general form of a single disbursement or receipt. Two commonly used factors relate a single cash flow in one period to another single cash flow in a different period. They are the compound amountfactor and the present worth factor.
The compound amount factor, denoted by (F/P,i,N), gives the future amount, F, that is equivalent to a present amount, P, when the interest rate is / and the number of periods is A". The value of the compound amount factor is easily seen as coming from Equation (2.1), the compound interest equation, which relates present and future values,
In the symbolic convention used for compound interest factors, this is written
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