Present Value Vs Future Value:

The future value (FV) measures the nominal future sum of money that a given sum of money is "worth" at a
specified time in the future assuming a certain interest rate, or more generally, rate of return. The FV is
calculated by multiplying the present value by the accumulation function.

Formula: FV = PV (1 + i)n

Present Value (PV) a future amount of money that has been discounted to reflect its current value, as if it
existed today OR the value today of a future cash inflow or outflow

Present value calculations are the reverse of future value calculations.

• In future value calculations, you determine how much money you will have at a date in the future given
a certain interest rate.
• In present value calculations, you determine how much must be invested today given a certain interest
rate to get to how much money you want in the future
Formula: PV = FV (1 + i)-n
Class Illustration: Congratulations!!! You have won a cash prize! You have two payment options: A -
Receive $10,000 now OR B - Receive $10,000 in three years. Which option would you choose?

Class Exercise-I: You are offered $1,000 four years from now or $800 in cash today.
A. What is the present value of the $1,000 if you assume an interest rate of 5%?
B. Knowing the answer to CE-I, which of the two offers should you accept: $1,000 in four years or $800 in cash today?
C. What is the present value of the $1,000 if you assume an interest rate of 8%?
D. If you can earn 8% on alternative investments, which of these two offers should you accept: $1,000 in four years or
$800 in cash today? (Answers: A. $822.70; B. $1,000; C. $735; D. $800)

Class Exercise-II: The Kaisers have accumulated a portfolio currently valued at $875,000. They believe that
they can earn an after-tax annual return of 8% on these funds. They would like to retire in 15 years.
A. What will be the estimated value of their portfolio at the time of their retirement?
B. What would the estimated value of their portfolio be if they deferred retirement for 5 more years?
Answers: A. $2,775,648; B. $4,078,338

Class Exercise-III: Mrs. Hayes places $2,500 in a certificate of deposit that pays 9% interest and matures
after 10 years.

A. How much interest will she earn if the interest is compounded annually?
B. How much interest will she earn if the interest is compounded monthly?
Answers: A. $5,918; B. $6,029

Class Exercise-IV: What is the balance in an account at the end of 10 years if $2,500 is deposited today and the account
earns 4% interest, compound annually? Quarterly? Answers: $3,700; $3,722

Class Exercise-V: If you deposit $10 in an account that pays 5% interest, compounded annually, how much will you
have at the end of 10 years? 50 years? 100 years? Answers: $16.29; $114.67; $1,315.01
Class Exercise-VI: Complete the following, solving for the present value, PV:
Interest Number of
Case Future Value Present Value
Rate Periods
A $10,000 5% 5
B $563,000 4% 20
C $5,000 5.5% 3
Answers: A=$7,835.26; B=$256,945.85; C=$4,258.07)
Class Exercise-VII: Suppose you want to have $0.5 million saved by the time you reach age 30 and suppose that you are
20 years old today. If you can earn 5% on your funds, how much would you have to invest today to reach your goal?
(Tip: find PV) Answer: $306,959.63

Class Exercise-VIII: To how much will $25,000 grow if left in the bank for 20 years at 6% interest?
Answer: $80,178.39

Class Exercise-IX: A city wants to issue $100,000 of non-interest-bearing bonds to be repaid in a lump sum in 5 years.
How much should investors be willing to pay for the bonds if they require a 10% return on their investment? (Tip:
find PV) Answer: $62,092.13

Class Exercise-X: Suppose you deposit $100,000 in an account today that pays 6% interest, compounded annually. How
long does it take before the balance in your account is $500,000 Answer: N=28 years

Class Exercise-XI: What is the length of time involved if a future amount of $10,000 has a present value of $3,000, and
the time value of money is 10% per year compounded semiannually? Answer: N=25 years ; 25/2=12.5 semi ann.

Class Exercise-XII: What is the length of time involved if a future amount of $100,000 has a present value of $75,000,
and the time value of money is 12% per year compounded monthly? Answer: N=29 years, 29/12 = 2.41

n 1% 2% 3% 4% 5% 6% 8% 10% 12% n 1% 2% 3% 4% 5% 6% 8% 10% 12%

1 0.990 0.980 0.971 0.962 0.952 0.943 0.926 0.909 0.893 17 0.844 0.714 0.605 0.513 0.436 0.371 0.270 0.198 0.146
2 0.980 0.961 0.943 0.925 0.907 0.890 0.857 0.826 0.797 18 0.836 0.700 0.587 0.494 0.416 0.350 0.250 0.180 0.130
3 0.971 0.942 0.915 0.889 0.864 0.840 0.794 0.751 0.712 19 0.828 0.686 0.570 0.475 0.396 0.331 0.232 0.164 0.116
4 0.961 0.924 0.888 0.855 0.823 0.792 0.735 0.683 0.636 20 0.820 0.673 0.554 0.456 0.377 0.312 0.215 0.149 0.104
5 0.951 0.906 0.863 0.822 0.784 0.747 0.681 0.621 0.567 21 0.811 0.660 0.538 0.439 0.359 0.294 0.199 0.135 0.093
6 0.942 0.888 0.837 0.790 0.746 0.705 0.630 0.564 0.507 22 0.803 0.647 0.522 0.422 0.342 0.278 0.184 0.123 0.083
7 0.933 0.871 0.813 0.760 0.711 0.665 0.583 0.513 0.452 23 0.795 0.634 0.507 0.406 0.326 0.262 0.170 0.112 0.074
8 0.923 0.853 0.789 0.731 0.677 0.627 0.540 0.467 0.404 24 0.788 0.622 0.492 0.390 0.310 0.247 0.158 0.102 0.066
9 0.914 0.837 0.766 0.703 0.645 0.592 0.500 0.424 0.361 25 0.780 0.610 0.478 0.375 0.295 0.233 0.146 0.092 0.059
10 0.905 0.820 0.744 0.676 0.614 0.558 0.463 0.386 0.322 26 0.772 0.598 0.464 0.361 0.281 0.220 0.135 0.084 0.053
11 0.896 0.804 0.722 0.650 0.585 0.527 0.429 0.350 0.287 27 0.764 0.586 0.450 0.347 0.268 0.207 0.125 0.076 0.047
12 0.887 0.788 0.701 0.625 0.557 0.497 0.397 0.319 0.257 28 0.757 0.574 0.437 0.333 0.255 0.196 0.116 0.069 0.042
13 0.879 0.773 0.681 0.601 0.530 0.469 0.368 0.290 0.229 29 0.749 0.563 0.424 0.321 0.243 0.185 0.107 0.063 0.037
14 0.870 0.758 0.661 0.577 0.505 0.442 0.340 0.263 0.205 30 0.742 0.552 0.412 0.308 0.231 0.174 0.099 0.057 0.033
15 0.861 0.743 0.642 0.555 0.481 0.417 0.315 0.239 0.183
16 0.853 0.728 0.623 0.534 0.458 0.394 0.292 0.218 0.163