Time Value of Money
Using Tables to Solve Present Value Problems
Present valuePresent Value:The reciprocal of future value. is simply the reciprocal of compound interest. Another way to think of present value is to adopt a stance out on the time line in the future and look back toward time 0 to see what was the beginning amount.
Present Value = P0 = Pn / (1+I)n
TVM Table 3 shows Present Value Factors. Notice that they are all less than one. Therefore, when multiplying a future value by these factors, the future value is discounted down to present value.
The table is used in much the same way as the previously discussed time value of money tables. To find the present value of a future amount, locate the appropriate number of years and the appropriate interest rate, take the resulting factor and multiply it times the future value.
An example illustrates the process.
How much would you have to deposit now to have $15,000 in 8 years if interest is 7%?