Principles of Managerial Finance

CHAPTER 4 Time Value of Money 161

918.46

1700 FV

N

CPT

PV

I

8

8

Solution

Input Function

Periods

024681012141618202224

1.00

0.75

0.50

0.25

Present Value of One Dollar ($)

5%

0%

15%

10%

20%

FIGURE 4.6

Present Value
Relationship
Discount rates, time periods,
and present value of one
dollar

EXAMPLE As noted, Pam Valenti wishes to find the present value of $1,700 to be received 8

years from now, assuming an 8% opportunity cost.

Table Use The present value interest factor for 8% and 8 years,PVIF8%, 8 yrs,

found in Table A–2, is 0.540. Using Equation 4.12, $1,7000.540$918. The

present value of the $1,700 Pam expects to receive in 8 years is $918.

Calculator Use Using the calculator’s financial functions and the inputs shown

at the left, you should find the present value to be $918.46. The value obtained

with the calculator is more accurate than the values found using the equation or

the table, although for the purposes of this text, these differences are

insignificant.

Spreadsheet Use The present value of the single future amount also can be cal-

culated as shown on the following Excel spreadsheet.

A Graphical View of Present Value

Remember that present value calculations assume that the future values are mea-

sured at the endof the given period. The relationships among the factors in a

present value calculation are illustrated in Figure 4.6. The figure clearly shows

that, everything else being equal, (1) the higher the discount rate, the lower the