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