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