Present Value:

Definition:

 The sum of money which if invested now at a given rate of compound

interest will accumulate exactly to a specified amount at a specified
future date.

 The process of finding the present value of a payment due at future date is
called discounting.

 The present value is also called the discounted value.

Formula: P.V= F.V / (1+i)n P.V-present value

or F.V-future value
P.V = sum x vn here v=1 / (1+i)n

Problem :1

Find the present value of interest of 6% per annam of Rs.300 payable 5 years.

solution:

given i=6%=6/100=0.06

n=5 years.

sum or F.V= Rs.300

P.V= F.V / (1+i)n

=300/(1+0.06)5

=300 x 0.74726

=224.178

=Rs.224.18
Problem: 2

A promises to pay B a sum of Rs.200 at the end of 3 years and another Rs.400
at the end of 5 years from now. What immediate each payment should B accept
in lieu of the above payments, if interest is reckoned at 5% p.a.?

solution:

The present value of the 1st payment to be made 3 years hence=sum x vn

=200/(1+0.05)3

= 200 x 0.86384

= Rs.172.768

The present value of the 2nd payment to be made 5 years hence=400 /(1+0.05)5

=400 x 0.78353

=Rs. 313.412

The total present value = Rs.172.768 + Rs. 313.412

=Rs.486.18
 Problem: 3

Find the present value at the rate of interest 7% p.a. of Rs.500 payable at the
end of 4 years and 3 months.

solution:

i= 7%=0.07

n=4 years 3 months=4 years

P.V = F.V / (1+i)n

=500/(1+0.07) 4

=500/(1.07) 4 (1.07)

=Rs.375.05

or

P.V =sum x v n

=500 x v4

=500 x v4v

=500 x 0.76290 x0.98323

=Rs.375.053
Problem: 4

What is the present value of Rs.1000 receivable at the end of 50 years, the rate
of interest being taken as 5% p.a.?

solution:

i=5% =0.05

F.V = Rs.1000

n=50

P.V= 1000/(1+0.05)50

=1000/(1.05)50

=1000 x 0.08720

=Rs.87.204
Problem: 5

Under a marriage endowment policy for Rs.20, 000, the sum assured is payable
at the end of the fixed term chosen. A claim for a policy of Rs.20, 000 has
occurred 12 years before the end of fixed term and the claimant requests for
immediate payment. Presuming that the insurer entertains such requests, what
is the sum payable if interest is reckoned at i)6 % p.a. ii)7% p.a. iii)8% p.a.

solution:

n = 12 years

sum =Rs.20000

i)6% p.a.

P.V = sum x v 12 @ 6%

=20000 x 0.49697 ( from table) or 20000/(1+0.06)12

= Rs.9939.40

ii)7% p.a.

P.V = sum x v 12 @ 7%

=20000 x 0.44401

= Rs.8880.20

ii)8% p.a.

P.V = sum x v 12 @ 8%

=20000 x 0.39711

= Rs.7942.20