DISCOUNTING

1
DISCOUNTING

• PROCEDURE WHEREBY THE PRESENT VALUE OF FUTURE
  INCOME IS DETERMINED.
• PRESENT VALUE OF A FUTURE PAYMENT
• PRESENT VALUE OF A SERIES OF PAYMENTS

2

• PRESENT VALUE OF A FUTURE PAYMENT
• PVO FVN /(1i)n
• OR
• PRESENT VALUE FUTURE VALUE /
• (1 COMPOUND RATE) CONVERSION PERIODS

3
Present Value Single Deposit (Graphic)

• Assume that you need 5,000 in 2 years. Lets
  examine the process to determine how much you
  need to deposit today at a discount rate of 7.

0 1 2
7
5,000
PV1
PV0
4
Present Value Single Deposit (Formula)

• PV0 FV2 / (1i)2 5,000 / (1.07)2
  FV2 / (1i)2 4367.19

0 1 2
7
5,000
PV0
5
General Present Value Formula

• PV0 FV1 / (1i)1
• PV0 FV2 / (1i)2
• General Present Value Formula
• PV0 FVn / (1i)n
• or PV0 FVn (PVD i,n) -- See Table A2

etc.
6
Valuation Using Table A2
PVD i,n is found on Table A2
7
Using Present Value Tables
PV2 5,000 (PVD 7,2) 5,000
(.873) 4365.00
8

• PROBLEM
• 6298.56 DISCOUNTED _at_ 8 FOR 3 YEARS
• PVO 6298.56/(1.08)3
• PVO 6298.56/(1.259712)
• PVO 5000

9
Example Problem

• Julie Miller wants to know how large of a
  deposit to make so that the money will grow to
  10,000 in 5 years at a discount rate of 10.

0 1 2 3 4 5
10
10,000
PV0
10
Problem Solution

• Calculation based on general formula PV0
  FVn / (1i)n PV0 10,000 / (1
  0.10)5 6,209.21
• Calculation based on Table A2 PV0 10,000
  (PVD 10, 5) 10,000 (.6209)
  6,209.00