The symbol i is the interest rate per period and n is the number of periods until the future payment must be made. Applying this formula to our two-year loan, we get $1/(1.08)2, or $0.8573. This is the same value shown in Exhibit 14A.2.
We can use this formula to find any present value. However, a simpler method is to use a present value table, which lists present values computed with this formula for various interest rates and time periods. Many people find it helpful in learning present value concepts to first work with the table and then move to using a calculator.
Exhibit 14A.3 shows a present value table for a future payment of 1 for up to 10 periods at three different interest rates. Present values in this table are rounded to four decimal places. This table is drawn from the larger and more complete Table B.1 in Appendix B at the end of the book. Notice that the first value in the 8% column is 0.9259, the value we computed earlier for the present value of a $1 loan for one year at 8% (see Exhibit 14A.1). Go to the second row in the same 8% column and find the present value of 1 discounted at 8% for two years, or 0.8573. This $0.8573 is the present value of our obligation to repay $1 after two periods at 8% interest (see Exhibit 14A.2).
| ||||
No comments:
Post a Comment