The Present Value of $1 table:
The Correct Answer and Explanation is :
The Present Value (PV) of $1 table is a financial tool used to determine the current worth of a future sum of money, discounted at a given interest rate for a specific number of periods. It helps investors or financial professionals assess how much a future payment is worth today, considering the time value of money.
Explanation of the Table:
The table typically lists various interest rates (often from 0% to 20%) across the top and time periods (like 1 year, 5 years, 10 years, etc.) down the side. To use the table, you would find the appropriate interest rate for your scenario (e.g., 5%) and then find the number of periods (e.g., 3 years). The intersection of the row and column gives you the Present Value factor.
For example, if you want to know the present value of $1 to be received 3 years from now at an interest rate of 5%, you would look at the 5% column and the row for 3 periods (years). The number you find there represents the factor by which you multiply $1 to determine its present value.
Formula:
Mathematically, the present value formula is:
[
PV = \frac{FV}{(1 + r)^n}
]
Where:
- ( PV ) = Present Value
- ( FV ) = Future Value
- ( r ) = Interest rate per period
- ( n ) = Number of periods
The table is a shortcut for quickly finding this factor without doing the math every time. By using the factor from the table, you can calculate the present value directly.
Example:
Let’s say you want to calculate the present value of $1 to be received 5 years from now at an interest rate of 8%. Using the table, you locate the factor in the row for 5 periods and the column for 8%. If the factor is 0.6806, you multiply it by $1 to get the present value of $0.6806.
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