6 - r = annual interest rate n = number of periods(typically years the present value is left on deposit The present value is given by PV = FV(1 r n

This preview shows pages 1–2. Sign up to view the full content.

A particular business deal allows you the choice of receiving \$1,000 today or receiving \$2,000 ten years from today. How would your choice change based on your ability to invest money at a very low rate of interest or a very high rate of interest? Present value , also known as present discounted value, is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis. Future value is the amount of money in future that a certain amount of money today will yield, given prevailing interest rates. Starting with the future value equation: FV = PV (1 + r) n Where FV = future value PV = present value

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: r = annual interest rate n = number of periods (typically years) the present value is left on deposit. The present value is given by: PV = FV / (1 + r) n The term 1 / (1 + r) n is known as the discount factor . If both the future value and present value are known, one can solve for the time or the interest rate using one of the techniques discussed in future value calculations. \$1,000 will become \$ 2,000 at a rate of interest = 7.18% per year. As \$ 1000 x (1+0.0718) 10 = \$ 2,000, or we can say that the present value of \$2,000 to be received 10 years from now discounted at the rate of 7.18% is \$ 1,000. If there are investment opportunities that yield more than 7.18 %, \$1,000 received today is a better choice. If there are investment opportunities that yield less than 7.18 %, \$2,000 received 10 years from today is a better choice....
View Full Document

This note was uploaded on 10/15/2011 for the course FIN 550 taught by Professor Smith during the Spring '11 term at Berklee.

Page1 / 2

6 - r = annual interest rate n = number of periods(typically years the present value is left on deposit The present value is given by PV = FV(1 r n

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online