Present Value of A Single Sum
Present Value of A Single Sum
Present Value of A Single Sum
Facts: We know a future value of €73,466 is to be paid or received in five years, and want to know the
present value.
Problem: Show this situation in time diagram form and determine the present value of
€73,466 to be received or paid in five years discounted at 8% compounded annually.
Solution:
1
= €73,466( 5
)
(1 + .08)
= €73,466(.68058)
= €50,000 (rounded by €.51)
To determine the present value factor of 0.68058, use a financial calculator or read the present
value of a single sum in Table 6.2 (8% column, five-period row).
Problem: Show this situation in time diagram form and determine the present value.
Solution:
1
= $2,000( 3
)
(1 + .08)
= $2,000(.79383)
= $1,587.66
Advise your relative to invest $1,587.66 now to provide you with $2,000 upon graduation. To satisfy
your relative’s other condition, you must pass this course (and many more).
FV = P V (F V F n,10% ) PV = F V (P V F n,10% )
$70,000 $47,811
F V F n,10% = = 1.46410 P V F n,10% = = .68301
$47,811 $70,000