Intro to PresentValue.

xls

IntRateEG gives an example of how money grows at compound interest in a bank account
PVIndianaLottery computes the present value of a lottery prize.
PresentValue contains the formula for computing present value.
a bank account
Interest Rates
Example 1: Growth of a bank account in which interest compounds
Principal 200

Per-period Growth of Bank Account with Compounding

Interest Rate 20% 1,000
Date Value 900
0 $ 100.00 800

Bank Account Value ($)

1 $ 120.00 700
2 $ 144.00 600
3 $ 172.80 500
4 $ 207.36 400
5 $ 248.83 300
6 $ 298.60 200
7 $ 358.32 100
0
8 $ 429.98
0 1 2 3 4 5 6 7 8 9 10
9 $ 515.98
10 $ 619.17 Period
ng

9 10
Year of Cash
Flow 2 Interest Rate 5% Yearly Payment
PV of Cash Present Value of
Flow $ 45,351 All Flows
Date Principal Interest
Amount
0 $ 45,351 $ 2,268 Date Received Discount rate
1 $ 47,619 $ 2,381 0 $50,000 1.000
2 $ 50,000 $ 2,500 1 $50,000 0.952
3 $ 52,500 $ 2,625 2 $50,000 0.907
4 $ 55,125 $ 2,756 3 $50,000 0.864
5 $ 57,881 $ 2,894 4 $50,000 0.823
6 $ 60,775 $ 3,039 5 $50,000 0.784
7 $ 63,814 $ 3,191 6 $50,000 0.746
8 $ 67,005 $ 3,350 7 $50,000 0.711
9 $ 70,355 $ 3,518 8 $50,000 0.677
10 $ 73,873 $ 3,694 9 $50,000 0.645
11 $ 77,566 $ 3,878 10 $50,000 0.614
12 $ 81,445 $ 4,072 11 $50,000 0.585
13 $ 85,517 $ 4,276 12 $50,000 0.557
14 $ 89,793 $ 4,490 13 $50,000 0.530
15 $ 94,282 $ 4,714 14 $50,000 0.505
16 $ 98,997 $ 4,950 15 $50,000 0.481
17 $103,946 $ 5,197 16 $50,000 0.458
18 $109,144 $ 5,457 17 $50,000 0.436
19 $114,601 $ 5,730 18 $50,000 0.416
19 $50,000 0.396
 You have just won $1 million in the lottery. You will
receive $50,000 right now and $50,000 per year for
$ 50,000 the next 19 years.

How much did you really win? Finance professionals

$654,266 would answer that question by using the concept of
present value. The present value of your lottery
winnings is how much one would have to put in
Amount the bank today, assuming an appropriate level of
Needed Now interest, in order to be able to make the promised
future payments.
$50,000
$47,619
$45,351
$43,192
$41,135
Present Value of Yearly Payments
$39,176
$60,000
$37,311
$35,534 $50,000

$33,842
$40,000
$32,230
Present Value

$30,696 $30,000
$29,234
$20,000
$27,842
$26,516 $10,000
$25,253
$0
$24,051
0 2 4 6 8 10 12 14 16 18 20
$22,906
Year
$21,815
$20,776
$19,787
 PresentValue

Present Value
Interest Rate 5%
Future Cash Flow $100.00

Year Principal Interest Present Value $ 90.70

0 $ 90.70 $ 4.54 Discount Rate 0.9070
1 $ 95.24 $ 4.76
2 $ 100.00

How can you determine the present value of a cash flow

to be received in the future?
(1) Obtain the correct interest rate.
(2) Determine the exact timing of the future cash flow. Call the time between now and receipt of the cash flow, t.
(3) Determine the appropriate discount factor:

1
Discount Rate =
( 1+Interest Rate )t
(4) Then Present Value = Cash Flow in Year t x Discount Rate

Cash Flow t
Present Value =
( 1+ Interest Rate )t

OLAB Stocks Lecture

 PresentValue

low, t.

OLAB Stocks Lecture