Lesson 1 presented the concept of the time value of money. The compound interest tables are used to solve time value of money problems and are particularly important when performing calculations as part of the income approach to value, specifically yield capitalization and discounted cash flow analysis. All of the functions are based on compound interest – interest earned is added to principal and itself earns interest from that time on. Each formula requires a periodic interest rate and the number of periods.
Each compound interest function is defined by a formula, which is the basis for calculating the compound interest factors for that function. Assessors’ Handbook Section 505, Capitalization Formulas and Tables, contains six compound interest functions and corresponding factor tables.
