Interest rates tell you how much an amount grows over time. That amount could be an investment or the unpaid principal on a loan. Inflation is the opposite—it tells you how much prices increase, which means the same amount of money buys less than it did before.
- [Instructor] When you analyze cash flows…whether in Excel, or using another tool,…you need to account for two important effects.…Interest and inflation.…Interest shows how much an investment grows over time.…If you've ever made an investment then you know…that a deposit of $10,000 will grow…by a certain amount every year.…That amount might be four percent, or five percent.…When you want to calculate the effects of interest…you use the following formula.…And that is the principal, that's the amount…you start with, multiplied by one plus the rate.…
And one plus the rate is raised to the power of time.…So let's break those elements down individually.…Principal is the original amount invested.…That could be $10,000, $5,000, whatever.…Rate is the interest rate.…When you add the interest rate to one…it's important that you do it…as a percentage, or as a decimal.…So for example, five percent would be….05 so you would end up with one…plus .05.…And finally, time is the number of periods.…
And that is the number…of times that the interest is compounded.…
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- Calculating the effect of interest rates and inflation
- Finding the arithmetic and geometric means of growth rates
- Calculating the future and present value of an investment
- Calculating loan payments for a fully amortized loan
- Calculating the effect of paying extra principal with each payment
- Finding the number of periods required to meet an investment goal
- Calculating net present value and internal rate of return
- Building a cash tracking worksheet
- Visualizing cash flows using a waterfall chart