Question

hunter is going to receive $3000 in one year and he wants to know its equivalent value today

Answer 1

we know,

PV of a future cash flow- is the Future cash flow discounted at a rate ( expected return/target return) . when we   discount the Future Cash flows at the appropriate discount rate, we get the Value in dollar terms as on today. the discount rate- will differ based on the expectations or risk apetitie of the user. A person who is risk averse may want a safe return on his investment-so his expected return may be Treasury Bills Rates. A person who is a risk taker - will expect a higher return than the Treasury rates- to compensate the risk he is taking.

Present Value    =    Future Cash flows     / ( 1+ i )ⁿ

                        ; i =   expected return and   n = period in which the CF is received from now

Accordingly, the equivalent value of 3000 to be received by hunter 1 year from now will be

              PV    =      3000   / (1+ i)¹         (which will be lesser than $3000)

                              =$ 3000   / (1+ i)