RECURSION & FINANCIAL MODELLING SUMMARY

Recurrence Relation

Rule

Notes

LINEAR GROWTH / DECAY

A.
V0 = principal

D=

r
100

AND

Simple Interest Loans / Investments

Vn+1 = Vn + D,
Vn = V0 + nDwhere D =

r
100

n = number of years
r = interest rate per year
D = amount of interest ($)
Vn = balance of loan/investment after
n years

x V0

x V0

B.
V0 = initial value of the asset

Vn D

where D =

AND

r
100

Vn+1 =
Vn = V0 nD
V0

x V0

C.
V0 = initial value of the asset
Vn D

Flat Rate Depreciation

AND

Vn+1 =

where D =

r
100

Vn = value of the asset after n years

x

Unit Cost Depreciation

Vn = V0 nD

D = cost per unit of use

GEOMETRIC GROWTH / DECAY

A.
V0 = principal

where R = 1 +

AND

Compound Interest Loans / Investments

Vn+1 = R Vn

r
100

Vn = Rn V0 where
V0 = principal

B.

R= 1+

R=1

n = number of compounding periods

r = interest rate per compounding
period
Vn = value of loan / investment after
n compounding periods

Reducing Balance Depreciation

V0 = initial value AND Vn+1 = R Vn , where

Vn = Rn V 0
= principal

100

r
100

where

R= 1

r
100

N = number of years
Vn = value of asset after n years
V0

COMBINED LINEAR & GEOMETRIC GROWTH / DECAY

Reducing Balance Loan
V0 = principal

AND

Vn+1 = RVn D

A useful formula for working out

D = regular payment
Vn = balance of the loan after n

where R = 1 +

r
100

how much interest youve paid after

any number of compounding periods
is:
PV + interest payments = FV

payments
r = interest rate per compounding
period
FINANCE SOLVER
PV is positive
Pmt is negative
FV is negative(still owe money) or
zero

Interest-only loan (reducing balance loan where interest = payment)

V0 = principal

AND

Vn+1 = Vn

D
V0 = principal

r
100

V 0

D = regular payment
r = interest rate per compounding
period
FINANCE SOLVER
Make PV = 1
Pmt is negative
FV = - PV

Annuity (money is invested and gradually withdrawn over a period of time)

V0 = principal

where R = 1 +

and

Vn+1 = R Vn D

D = regular payment received

r = interest rate per compounding
period
FINANCE SOLVER
PV is negative
Pmt is positive
FV is positive(money still left in the
account) or zero

r
100

Perpetuity (annuity where interest = payment received)

V0 = principal

AND

Vn+1 = Vn

D
V0 = principal

r
100

V 0

D = regular payment received

r = interest rate per compounding
period
FINANCE SOLVER
Make PV = 1
Pmt is positive
FV = - PV

Compound Interest Investments with Regular Additions to the Principal (Annuity Investment)
V0 = principal

and

Vn+1 = R Vn + D

D = regular addition to the principal

R = interest rate per compounding
period

where R = 1 +

r
100

FINANCE SOLVER
PV is negative
Pmt is negative
FV is positive
The interest rate per compounding period can be found from an
Amortisation Table by calculating:

first int erest paid

100
original balance