Present Value

What if we know the Future Value, but dont know the Present Value?
FV = PV x (1 + r)n => PV = FV / (1 + r)n

How much would you have to invest today in a CD that earns 8% interest/year to have $108 next year?
PV = $108 / (1.08) = $100

How about if you want $125.97 in three years?

PV = $125.97 / (1.08)3 = $100

How about if you want $100 next year?

PV = $100 / (1.08) = $92.59 The present value of $1 next year is 93 cents at 8%

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Present Value (PV) Calculations

PV = FV / (1 + r)n or PV = FV x (Table 2 factor for n, r) or =-PV(r,n,0,FV) in Excel (r of 10% would be 0.10)

How much should you have invested in a savings bond twenty years ago to have $10,000 today? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond was 15% (compounded annually)

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Present Value (PV) Calculations

How much should you have invested in a savings bond twenty years ago to have $10,000 today? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond was 15% (compounded annually)

PV = 10,000 / (1.15)20 or PV = 10,000 X (Table 2 factor for 20, 15%) PV = 10,000 x 0.0611 PV = $611

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Present Value (PV) Calculations

What if the interest rate was only 5%? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond (r) was 5% (compounded annually)

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Present Value (PV) Calculations

What if the interest rate was only 5%? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond (r) was 5% (compounded annually)

PV = 10,000 / (1.05)20 or PV = 10,000 X (Table 2 factor for 20, 5%) PV = 10,000 X 0.3769 PV = $3,769

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Present Value (PV) Calculations

What if you bought the savings bond ten years ago? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond (r) was 15% (compounded annually)

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Present Value (PV) Calculations

What if you bought the savings bond ten years ago? Assume the following:
Savings bonds have no periodic interest payments (interest is added to the principal and compounded) Interest on the bond (r) was 15% (compounded annually)

PV = 10,000 / (1.15)10 or PV = 10,000 X (Table 2 factor for 10, 15%) PV = 10,000 x 0.2472 PV = $2,472

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Present Value (PV) Calculations

How about 30 years? How about 25%?

What do you notice?

Present value (PV) is inversely related to the rate of return (r) and the number of periods (n)

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Net Present Value and Decision Making

Lay out a timeline of the cash inflows and outflows Convert the cash flows in each period to the present values Add up the present values Net Present Value is the sum of the present values
Often involves a cash outflow in todays dollars and cash inflows in future dollars, which must discounted back to present value.

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NPV of two projects

Cash flows: Project A: Project B: PV @ 10%: Project A: Project B: NPV: Project A: Project B: 0 1 -100 0 -100 80 0 1 -100 0 -100 73 2 0 50 2 0 41 3 0 30 3 0 23 4 200 0 4 137 0

-100 + 0 + 0 + 0 + 137 = $37 -100 + 73 + 41 + 23 + 0 = $37

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