CS Executive · Corporate Accounting and Financial Management · Time Value of Money
In loan amortisation and capital recovery calculations, the capital recovery factor is the reciprocal of which of the following?
The capital recovery factor is the reciprocal of the present value interest factor of an annuity. It gives the equal periodic payment needed to repay or recover a present amount with interest. The sinking fund factor is the reciprocal of the future value annuity factor instead.
- APresent value interest factor of an annuity (PVIFA)Correct
- BFuture value interest factor of an annuity (FVIFA)
- CPresent value interest factor (PVIF) of a single sum
- DFuture value interest factor (FVIF) of a single sum
Explanation
The capital recovery factor converts a present sum into the equal periodic payments that recover it with interest, so it equals 1/PVIFA. The sinking fund factor, by contrast, is 1/FVIFA because it converts a future sum into equal periodic deposits.
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