### 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

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Last modified January 29th, 2019