Present value of a single amount Calculation Examples, Concepts, Illustrations, Sample Help Online
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Understanding the concept of Present value of a single amount Calculation Examples
Present value of a single amount means an amount received today has more value than receiving that amount in future. It means receiving $100 today is of more value than receiving $100 on a future date. Therefore, to find the value of amount received in future on a present date we need to calculate the Present value of a single amount.
We can calculate present value of a future single sum of money is by using the following formula:
Present Value (PV) = Future Value (FV)/(1 + i)n
i is the interest rate per compounding period; and
n is the number of compounding periods.
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Present value of a Single Amount Calculation Examples Explanation
Let understand with help of an example.
Example 1: Calculate the present value on Jan 1, 2011 of $1,500 to be received on Dec 31, 2011. The market interest rate is 9%. Compounding is done on monthly basis.
Solution: We have,
Future Value FV = $1,500
Compounding Periods n = 12
Interest Rate i = 9%/12 = 0.75%
Present Value PV = $1,500 / ( 1 + 0.75% )^12
= $1,500 / 1.0075^12
= $1,500 / 1.093807
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