Question

be original and used ypur own word

1. Please choose one topics of your choice from chapters 5-7 and describe in your own words what you learned providing an explanation of 200 words for each topic.

I choose present value and discounting

Add your references

Answer 1

Present Value and Discounting:

As the concept of time value of money states that the value of money decrease with passing time therefore the future value of money always will be lower than the present value of the same amount of money. This concept of time value of money exists because of reinvestment opportunities, inflationary impact or preference to consume today rather in future.

To calculate time value of money, if there is a single amount to be received or paid in future then present value of this will be equal to

PV = Future Value/(1+r)^n

If the present value needs to be calculated for regular future equal amount of cash flow series (annuity) then the formula will be

Present value = A/r [(1 - 1/(1+r)^n)]

where A is the annuity payment

r is the rate of discounting

n is the no. of years

The concept of present value is very useful in many regular events. For exmple:

1. A person wants to know that if he pays $2000 per month for next 20 years, how much amount of loan he can get today.

2. A person wants to know that if he saves $2500 per year than how much he will receive after 20 years from now.

3. An investor wants to receive a regular cash flow 0f $20000 every year for next 25 years than how much amount he is required to deposit today.

4. A person is provided two options: Option 1 is he can receive $ 1000 right now or Option 2 is he can 300$ per year for the next 4 years. While discounting rate being 10% he has to decide that which option is better one.