Question

Use the tabular method

1.What is the future value of $100,000 invested today for 5 years @8% interest compounded annually? (future value of a sum)

2.What is the present value of $1,000,000 to be received in 10 years DISCOUNTED @ 7% per annum?(present value of a sum)

Answer 1

FV = $146932.8

PV = $508336.72

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Future value is calculated by compounding the Present cash flow

The formula is,

FV = Present value *(1 + r)^n

= 100000*(1 + 0.08)^5

= 100000*(1.08)^5

= 100000*(1.4693280768)

= 146932.80768

So FV value of 100000 received after 5 years is 146932.8

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If the amount to be received in the future is FV, rate of interest is r and time period is n then PV of that amount can be calculated using below formula

PV = FV/ (1+r)^n

Where,

FV = $1000000

r = 7%

n = 10

Let's put all the values in the formula to find PV

PV = 1000000/ (1 + 0.07) ^10

       = 1000000/ (1.07) ^10

       = 1000000/ 1.9672

       = 508336.72

So PV of $1000000 is $508336.72

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Hope that helps.

Feel free to comment if you need further assistance J