Note: if you cannot remember what a reducing balance system is, revise notes for 1.2 Forms of Depreciation and 1.3 Predicting Future Values for Depreciation Systems.
Modelling using Recursion Relations
- A reducing balance system with regular repayments describes a system which has a negative interest rate, and positive deposits made at the end of each compounding period.
- We can use the simple recursion formula to model this system:
Where d>0 and I<0.