BFN 2101 - B2C FInancial

Management

SINGLE
AMOUNT
BAYRON, ARTLYN E.
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What Is the The value of a future
Present Value promise to pay or receive a
single amount at a specified
of a Single interest rate is called the
Amount? present value of a single
amount.

What we'll discuss today

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EXPLANATION
In many business and personal situations, we are
interested in determining the value today of
receiving a set single amount at some time in the
future.

For example, assume that you want to know the

value today of receiving $15,000 at the end of 5
years if a rate of return of 12% is earned.
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What is the amount that would have to be
invested today at 12% compounded annually if
you wanted to receive $15,000 at the end of 5
years?

These are present-value-of-a-single-amount

issues because we want to know the present
value, or the value today, of getting a specified
sum in the future.
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We know that the
present value will be less
than the future value.
The amount you would be willing to
accept depends on the interest rate or
the rate of return you receive.
Formula to Calculate the Present Value 5
of a Single Amount

Where,
PV = Present value of the amount
FV = Future value of the amount (amount to be received in future)
i = Interest rate in percentage
n = number of periods after which amount will be received in
future
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A Company is expecting
to receive $8,000 after 5
years from now. Calculate

EXAMPLE: the present value of this

sum if the current market
interest rate is 12% and
the interest is
compounded annually.
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Solution PV = FV x 1 / (1+i)^n
Using the above present
= 8,000 x 1 / (1+12%)^5
value formula: = 8,000 x 1 / (1+0.12)^5
= 8,000 x 1 / (1.12)^5
*Number of periods (n) = 5 = 8,000 x 1 / 1.7623
*Interest rate (i) = 12% = 8,000 x 0.5674
= $4,540
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The amount of $8,000 to be received
after 5 years has a present value of
$4,540. This example shows if the
$4,540 is invested today @12%
interest rate per year compounded
annually, it will grow to $8,000 after 5
years.
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What Is the The value of a current
Future Value single amount taken to a
future date at a specified
of a Single interest rate is called the
Amount? future value of a single
amount.

What we'll discuss today

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EXPLANATION
To explain the concept of the future value of a
single amount, let’s assume the following data:
Formula to Calculate the Future Value of 11
a Single Amount

Where:
p = Principal amount
i = Interest rate
n = Number of compounding periods
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That is, in the example of

EXAMPLE: the $10,000 compounded

annually for 3 years at
12%.
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Solution
Using the above future
value formula: FV= p (1+i)^n

*Number of compounding =$10,000 x (1+12%)^3

=$10,000 x (1.12)^3
periods (n) = 3
=10,000 x 1.404928
*Interest rate (i) = 12%
=14,049.28
*principal amount (p) =
$10,000
 Distinguishing Between Future Value and 14
Present Value of a Single Amount
In beginning to work with time-value-of-money problems, you should be
careful to distinguish between present-value and future-value problems.
One way to do this is to use timelines to analyze the situation.

For example, the timeline relating to the example in which we determined

the future value of $10,000 compounded at 12% for 3 years is as follows:
Distinguishing Between Future Value and 15
Present Value of a Single Amount

But the timeline relating to the present

value of $15,000 discounted back at
12% for 5 years is:
PROBLEM: Present Value of Single 16
Amount

Ricka is expecting to receive $5000 after 3years

from now. Calculate the present value of this
sum if the current market interest rate is 6% and
the interest is compounded annually.
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Solution PV = FV x 1 / (1+i)^n
Using the above present
= 5000 x 1 / (1+6%)^3
value formula: = 5000 x 1 / (1+0.06)^3
= 5000 x 1 / (1.06)^3
*Number of periods (n) = 3 = 5000 x 1 / 1.1910
*Interest rate (i) = 6% = 5000 x 0.8396
= $4,198/$4,198.1
PROBLEM: Future Value of Single 18
Amount

That is, in the example of the $15,000

compounded annually for 5 years at 6%
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Solution Accumulated
Using the above present
value formula: Amount= p (1+i)^n

*Number of periods (n) = 5

*Interest rate (i) = 6% =$15,000 x (1+6%)^5
*principal amount (p) = =$15,000 x (1.06)^5
=$15,000 x 1.3382
$15,000
=$20,073/$20,073.38
PROBLEM: Determining the Number of 20
Periods or the Interest Rate

assume that you invest $5,000 today in a savings and

loan association that will pay interest at compounded
annually. You need to accumulate $8,857.80 for a certain
project. How many years does the investment have to
remain in the savings and loan association?
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Solution F= FV x PV
Using the general formula

FV = Future Value = 8,857.80/5,000.00

F -Factor = 1.77156
PV = Present Value
Thank you!
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