PV1 Present Value Example

Problem

What is the present value of a lump sum of 45,000 received in 5 years time when the discount rate is 7.25% compounded annually?

Solution

The amount of 45,000 (FV) is received at the end of year 5, and needs to be discounted back 5 years (n) to the start of year 1, at a discount rate of 7.25% (i).

This problem is solved using the present value of a lump sum formula as follows.

FV = 45,000
n = 5
i = 7.25%
PV = FV /(1 + i)n
PV = 45,000 /(1 + 7.25%)5
PV = 31,712.17

Explanation

At a discount rate of 7.25%, receiving 45,000 in 5 years time is equivalent to receiving 31,712.17 now.

PV1 Present Value Example

This is one of many time value of money examples, discover another at the links below.

• AN8 Annuity Examples