For instance, imagine you want to save $10000 in five years To find the periodic payment needed to be used. A financial formula that considers the interest rate and time is required, let's assume an annual interest rate of 5%.
The formula for the future value FV or payment in this scenario is
FV = Pv
(1+r)n
where: FV is the future value ( in this case,$10000)
Pv is the present value( the initial amount you want to save)
r is the interest rate per period (5% or 0.05)
n is the number of periods ( five years)
rearranging the formula to solve for PV, present value, or the periodic payment
PV= 10000
(1+0.05)5
calculating this gives the periodic payment to attain the future value of $10000 in five years.
This example demonstrates the application of financial principles to determine the required periodic payment, showcasing the practicality of understanding and utilizing such calculations in financial planning.