Financial Management: Core Concepts, Third Edition

3.2 Present Value and Discounting

So far, you have learned how money grows over time, and it’s a fairly straightforward concept. However, what if we are interested in the current value of something that we will receive in the future? This concept of present value is a bit trickier to understand, but it helps us put a price or value today on a future cash receipt.

The Single-Period Scenario

As with our future value calculations, let’s start with a single-period case. Say you want to buy a new laptop next year and the one you have in mind should be selling for $1,000 a year from now. How much do you need to put away today at 5% interest to have $1,000 a year from now? In essence, you are trying to determine how much $1,000 one year from now is ...