# Concept of Present Value

**Topics:**Time value of money, Net present value, Rate of return

**Pages:**5 (1264 words)

**Published:**April 21, 2010

2a. $500 if invested for five years at a 4% interest rate:

FV = 500 (1 + .04)^1) = 500 (1.04) = $520.00

FV = 520 (1 + .04)^2) = 520 (1.0816) = $540.80

FV = 540.80 (1 + .04)^3) = 540.80 (1.124864) = $562.43

FV = 562.43(1 + .04)^4) = 562.43(1.169859) = $584.93

FV = 584.93(1 + .04)^5) = 584.93 (1.216653) = $608.33

End of Year12345

Principal$500.00$520.00$540.80$562.43$584.93

Interest$20.00$20.80$21.63$22.50$23.40

Total$520.00$540.80$562.43$584.93$608.33

2b. $150 if invested for three years at a 9% interest rate:

FV = 150 (1 + .09)^1) = 150 (1.09) = $163.50

FV = 163.50(1 + .09)^2) = 163.50(1.1881) = $178.22

FV = 178.22 (1 + .09)^3) = 178.22 (1.295029) = $194.25

End of Year123

Principal$150.00$163.50$178.22

Interest$13.50$14.72$16.04

Total$163.50$178.22$194.25

2c. $9100 if invested for seven years at a 3% interest rate:

FV = 9100 (1 + .03)^1) = 9100 (1.03) = $9373

FV = 9373 (1 + .03)^2) = 9373 (1.0609) = $9654.19

FV = 9654.19 (1 + .03)^3) = 9654.19 (1.092727) = $9943.82 FV = 9943.82 (1 + .03)^4) = 9943.82 (1.12550881) = $10242.13 FV = 10242.13 (1 + .03)^5) = 10242.13 (1.15927407) = $10549.39 FV = 10549.39 (1 + .03)^6) = 10549.39(1.1940523) = $10865.88 FV = 10865.88(1 + .03)^7) = 10865.88 (1.22987387) = $11191.85

End of Year1234567

Principal$9,100.00$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88 Interest$273.00$281.19$289.63$298.31$307.26$316.48$325.98 Total$9,373.00$9,654.19$9,943.82$10,242.13$10,549.39$10,865.88$11,191.85

2d. $1000 if invested for ten years at a 0.5% interest rate:

FV =...

References: Anonymous (2010). Investopedia.com. Present Value. Retrieved on 5 Apr 2010 @ http://www.investopedia.com/terms/p/presentvalue.asp

2 Megginson, William (2008). Corporate Finance. Stamford: Thomson Learning. P. 86.

3 Anonymous (2010). Investopedia.com. Explaining Present Value-PV. Retrieved on 5 Apr 2010 @ http://www.investopedia.com/terms/p/presentvalue.asp

4 Anonymous (n.d). FinanceProfessor.com. Future Value. Retrieved on 3 Apr 2010 from http://www.financeprofessor.com/fiancnenotes/introductoryfin/presentvalue.htm

5 Anonymous (n.d). FinanceProfessor.com. Present Value. Retrieved on 3 Apr 2010 from http://www.financeprofessor.com/fiancnenotes/introductoryfin/presentvalue.htm

6 Anonymous (2008). The Time Value of Money. Retrieved on 4 Apr 2010 from http://www.econedlink.org/lessons/index.cfm?lesson=EM37

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