1. A GENERAL MODEL FOR EXPONENTIALLY COMPOUNDING AND DISCOUNTING FUTURE CASH FLOWS.
- Author
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Thompson Jr., William W.
- Subjects
CASH flow ,CASH management ,DISCOUNTED cash flow ,DEBT management ,QUICK assets ,SYSTEM analysis ,DECOMPOSITION method ,MATHEMATICAL models ,CORPORATE finance ,PRESENT value ,SYSTEMS theory ,EXPONENTIAL functions - Abstract
This paper presents a general model to be used in adjusting cash flows which occur over future time intervals to reflect the effects of continuous compounding and/or discounting. The method is illustrated by means of a hypothetical example. The framework of analysis employed here may be extended to other systems having similar characteristics of growth and decay. In the physical and biological sciences, it often happens that the rate of change in the quantity of a substance is proportional to the amount of the substance present at the time. In such cases, the associated system is said to be subject to "exponential growth" or "exponential decay." A classic example of this phenomenon is the continous decomposition of radioactive materials. In this instance, the rate of decomposition at any given time is proportional to the amount of material remaining at that time. Similarly, the reproduction of bacteria is a familiar process which, under certain conditions, involves exponential growth. Exponential models have been used to describe a wide variety of systems in the social sciences and medicine. For example, human populations under certain conditions are subject to exponential growth. Isard [10] cites several studies involving the use of an exponential form to predict changes in city population. This same methodolgy may be extended to analyses involving wildlife and marine population patterns, migration, disease epidemics, and other analogous economic and sociological systems. In this paper, the primary concern is with cash flow systems. It should be noted however, that the model developed here may be extended to other applications. [ABSTRACT FROM AUTHOR]
- Published
- 1965
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