Example 2

This example illustrates how to determine the contribution required when the value of discounted future cash flows falls short of the full cost of an item. The diagram below visualises the cash flow dynamics:

Example Calculation Inputs

• Advance: This is shown by a blue downward arrow at the start of the timeline, indicating the full cash price or loan value before your contribution is known.
• Payments:
  • The red up arrow at the start of the time line is the deposit contribution you’re solving for.
  • Those represented by blue upward arrows are the regular payments you can manage.
• Interest Rate: Although not shown in the diagram, this rate is used to discount the future payments to their present value. It can be based on a best guess or actual lender rate.

Benefits and Implications

Understanding how much you may be required to contribute towards the cost of an item is vital for making informed financial decisions, especially when considering purchasing significant items. If the calculated contribution amount exceeds the cash you have on hand:

• Extend the loan term to lower the contribution payment.
• Seek a lender with more favourable rates.

If the calculated amount is lower than what you may wish to contribute:

• You could opt for lower monthly payments.
• Shorten the loan term to reduce overall interest paid.

This example helps you navigate these decisions by providing a clear financial picture based on your current cash resources and market rates.