44 Corporate Finance
Exhibit 2.1b Future value interest factor
Interest rate r (percent)
Year (n)8 9 10 11 12
1 1.080 1.090 1.100 1.110 1.120
2 1.166 1.188 1.210 1.232 1.254
3 1.260 1.295 1.331 1.368 1.405
4 1.360 1.412 1.464 1.518 1.574
5 1.469 1.539 1.611 1.685 1.762To find the value of Re 1 at 10 percent for 5 years, go to the Cell at the interaction of the 5th row and
3rd column. The value is 1.6111. Similarly, try 12 percent and 4 years. Now find the future value of Rs 282
at 10 percent for 3 years:
Future Value = A(1 + r)n = 282 × FVIF10,3 = 282 × 1.331 = Rs 375.50Present Value
We saw that Rs 100 grows to Rs 108 at an interest rate of 8 percent p.a. Let us do the reverse now. How
much do we need to set aside today in order to produce Rs 108, a year from now? The amount is referred
to as present value of Rs 108.
Future Value (FV) = A(1 + r)nA= n
r)1(FV
+
i.e., PV= n
r)1(
FV
+
(2)
The process of bringing a cash flow to the present is called discounting. The rate of interest is called
the discount rate—at which present and future values are traded off. The term [1/(1 + r)t] is called
Present Value Interest Factor or PVIF.