Financial Modelling
Financial modelling uses mathematical functions to analyse loans, investments, and annuities, enabling informed decision-making about borrowing and saving.
What You Need to Know
Key Concept Diagram
Compound interest: A = P(1 + r/n)^(nt) grows principal P at rate r compounded n times per year
Simple interest: I = Prt grows linearly, while compound interest grows exponentially
A loan amortisation table shows how each repayment splits into interest and principal reduction
Net present value (NPV) converts future cash flows to today's value for investment comparison
Break-even analysis finds the point where total revenue equals total cost
Key Vocabulary
Compound interest
Interest calculated on both the original principal and accumulated interest from previous periods
Amortisation
The process of gradually paying off a debt through regular scheduled payments
Net present value
The current worth of a series of future cash flows, discounted at a specified rate
Break-even point
The level of output or sales at which total revenue equals total costs
Knowledge Check
Select the correct answer for each question. Click "Check Answer" to see if you are right.
Question 1
$5000 is invested at 4% per annum compounded annually for 3 years. What is the amount after 3 years?
Question 2
What distinguishes compound interest from simple interest?
Question 3
A business has fixed costs of $2000 and variable costs of $8 per unit. Revenue is $12 per unit. What is the break-even quantity?
Key Concepts Summary
- ●Compound interest: A = P(1 + r/n)^(nt) grows principal P at rate r compounded n times per year
- ●Simple interest: I = Prt grows linearly, while compound interest grows exponentially
- ●A loan amortisation table shows how each repayment splits into interest and principal reduction
- ●Net present value (NPV) converts future cash flows to today's value for investment comparison
- ●Break-even analysis finds the point where total revenue equals total cost