6. Summary

In this section, we have learned to compute the future value of virtually any cash flow stream. Specifically, we have seen that the future value of a cash flow that occurs at time t (Ct) and remains invested until time T can be computed as:

 

\( \bf{FV_T = C_t \times (1+R)^{(T-t)}} \)

   

More importantly, we have gotten to know the principle of value additivity: The future value of a string of cash flows can be calculated as the sum of the future value of each individual cash flow:

   

\( \bf{FV_T = \sum_{t=0}^{T} C_t \times (1+R)^{(T-t)}} \)

  

With this knowledge, we can determine the expected outcome of a great variety of investment proposals.