MICRO AGRI PRODUC T

Module 5: Session 1.
Explaining the Denominator of the Cash Flow Formula

The number 1 in the denominator of the cash flow formula below,

Adjusted Capacity
1 + (interest * term)

essentially represents the loan principal and is used to simplify an otherwise longer
computation procedure.

Example:
Adjusted repayment capacity = 500
Interest rate = 2% per mo.
Term = 3 month

Using the formula above will give us the following result:

500 = 500 = 471.6981

1 + (.02 * 3) 1.06

The long-cut version of the formula is as follows:

Adjusted capacity * Adjusted capacity

Adjusted capacity + (Adjusted capacity * Interest rate * Term)

500 * 500 = 500 * 500 = 0.943396 * 500 = 471.6981

500 + (500 * .02 * 3) 530

MAP_Module 5, Session 1, Handout 2: Denominator of Cash Flow Formula