Rate Of Return on Savings

£100 invested today is worth more in the future.
Compounding: this refers to the adding of interest each year.

  • If the rate of interest was 10%. Then £100 is worth

Year 1              £110
Year 2              £121
Year 3              £133.10

TO calculate the value of £100 in year x.

      x
100 * (1+r)

E.g. if interest rate was 10% Then after 4 years £100 is worth:

                 4
100 * (1.1)       = £146.41

Present Value Approach

 

This involves estimating the value now of all future flows and costs
The principle of reducing future benefits to current values is known as Discounting

PV =                X t             
                                t
                        (1+r)

£1000 in one year hence is                    1000   1               = £909
(1+10)
       
£1000 in 5 years hence is          1000  5                                 = £1000/ 1.61 =£620.92