Question

Tensing Palmo expects to receive $8,326 on his birthday 7 years from now. He knows he could earn 0.0583 on an investment for 7 years. The present value of this money is:

Answer 1

Present Value (PV): It is the current value for the future value known with earning some rate of return. Future cash flows are at discount rate. In simple words it the worth value of money today equals to future value by effecting into some economic factors. The present value gets increased in future due to the current economic conditions, inflation, demand and supply of money etc.

To calculate present value of money for the future value known we use below formula;

Here;

FV = Future Value

r = Rate of return

n = Number of periods

1 is used to have compounding effect in formula

From above question, we have future value of $8,326, rate of return equals to 5.83% (considering the percentage is given in numerical values so we get from 0.0583 * 100 = 5.83% and we will use numerical values into formula to ease calculation) and number of periods is 7 Years.

So, putting values into PV formula we will have;

Present Value = $8,326 / (1 + 0.0583) ^7   

= $8,326 / (1.0583) ^7

[(We calculate (1.0583) ^7 as 1.0583 into 7 times i.e. 1.0583*1.0583*1.0583*1.0583*1.0583*1.0583*1.0583)]

= $8,326 / 1.486831

= $5599.83

So, Tensing Palmo earns interest of $2726.17 and Present value of money will be $5599.83