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Brief Review - Present Value

# Brief Review - Present Value - Supplement Present Value...

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Supplement Present Value Review

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2 There’s an old saying, time is money. This saying reflects the notion that as time passes, the value of financial assets and liabilities we hold are changing, due to interest. e.g. \$1,000 today is worth more than \$1,000 twenty years from now. \$1,000 in the future will be worth less than \$1,000 now. \$1,000 \$1,000 Today Future
3 ? = \$1,000 Today Future The present value of an amount applies when we either lend or borrow an asset that must be repaid in full at some future date, and we want to know its worth today. Present value computations are a means for us to estimate the interest component of holding assets or liabilities over time. There are two present value calculations: A: the present value of a single amount. B: the present value of a series of amounts (or annuity).

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4 A. Finding the PV of a Single Amount in the Future Final Payment \$100,000 Year 1 Year 2 Year 3 Year 4 Year 5 PV ?
5 Method 1: Formula for Present Value PV = FV = FV(1+i) -n (1+i) n Method 2: Use the Charts Note: For the formulas and the charts, the periodic rate must be used. n = number of interest periods i = interest for the period (so 6% compounded semi- annually would be 6%/2 = 3%

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6 Method 2: Use the Charts Present Value of 1 due in n periods Rate Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 15% 1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.8929 0.8696 2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.7972 0.7561 3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7118 0.6575 4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6355 0.5718 5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5674 0.4972 6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5066 0.4323 7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4523 0.3759 8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4039 0.3269 9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3606 0.2843 10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3220 0.2472 11 0.8963 0.8043 0.7224 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.2875 0.2149 12 0.8874 0.7885 0.7014 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2567 0.1869 13 0.8787 0.7730 0.6810 0.6006 0.5303 0.4688 0.4150 0.3677 0.3262 0.2897 0.2292 0.1625 14 0.8700 0.7579 0.6611 0.5775 0.5051 0.4423 0.3878 0.3405 0.2992 0.2633 0.2046 0.1413 15 0.8613 0.7430 0.6419 0.5553 0.4810 0.4173 0.3624 0.3152 0.2745 0.2394 0.1827 0.1229 16 0.8528 0.7284 0.6232 0.5339 0.4581 0.3936 0.3387 0.2919 0.2519 0.2176 0.1631 0.1069 17 0.8444 0.7142 0.6050 0.5134 0.4363 0.3714 0.3166 0.2703 0.2311 0.1978 0.1456 0.0929 18 0.8360 0.7002 0.5874 0.4936 0.4155 0.3503 0.2959 0.2502 0.2120 0.1799 0.1300 0.0808 19 0.8277 0.6864 0.5703 0.4746 0.3957 0.3305 0.2765 0.2317 0.1945 0.1635 0.1161 0.0703 20 0.8195 0.6730 0.5537 0.4564 0.3769 0.3118 0.2584 0.2145 0.1784 0.1486 0.1037 0.0611
7 Method 3: Using a financial Calculator N = total number of periods I/Y = ANNUAL effective interest rate PV = Present Value PMT = periodic payments (0 if only calculating the PV of the final FV payment) FV = Future Value 2 nd P/Y, C/Y = Payments/year, Compounding periods/year

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