Table15-2 The Present Value of a Single Sum Several Years in the
Future
Table 15-2 computes the present value of an MRP of $500 received
several years in the future. The table has two parts. In Part A, we keep the
date of the MRP fixed and vary the interest rate. In Part B, we keep the
interest rate fixed and vary the date of the MRP. This allows us to see the
separate effects of varying i and t, and leads to the following conclusion.
Other things being equal, the present value of a given sum payable in the future will be
smaller the more distant the payment date, and it will be smaller the higher the rate of
interest.The present value of a future sum is negatively related to the interest
rate and negatively related to the length of time before the sum occurs
In all the rows in Part A, the firm receives an MRP of $500 in three years’
time, but the interest rate varies. Using the formula from the text, we see
that the higher is the interest rate, the lower is the present value of the
future MRP. In all the rows in Part B, the interest rate is 6 percent per
year, but the future date of the MRP varies. The computations show that
the more distant in time is the MRP, the lower is the present value.