Letting pv equal this unknown amount and using the

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Unformatted text preview: and using the same notation as in the future value discussion, we have PV (1 0.06) $300 (4.7) Solving Equation 4.7 for PV gives us Equation 4.8: PV $300 (1 0.06) $283.02 (4.8) The value today (“present value”) of $300 received one year from today, given an opportunity cost of 6%, is $283.02. That is, investing $283.02 today at the 6% opportunity cost would result in $300 at the end of one year. The Equation for Present Value The present value of a future amount can be found mathematically by solving Equation 4.4 for PV. In other words, the present value, PV, of some future amount, FVn, to be received n periods from now, assuming an opportunity cost of i, is calculated as follows: PV FVn (1 i)n FVn 1 (4.9) i)n (1 Note the similarity between this general equation for present value and the equation in the preceding example (Equation 4.8). Let’s use this equation in an example. EXAMPLE Pam Valenti wishes to find the present value of $1,700 that will be received 8 years from now. Pam’s opportunity cost is 8%. Substituting...
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This document was uploaded on 03/03/2014 for the course MBA BMMF at Open University Malaysia.

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