5. Introduction to the present value of money Aa Aa Under the concepts of the time value of money, you can determine the current, or present, value of a cash reoeipt on payment that will occur at some specified time in the future, given a specified rate of interest. This technique can be used to calculate the present value of a single or a series of future receipts or payments. Lexi and Luke are walking after class between the library and the best pizzeria near campus. They're discussing Dr Boudreaux's lat st financial anagement lecture, which addressed the concept of present value nd the process for calculating it. In anticipation of tomorrow's quiz, they've decided to review their lecture notes and the textbook materials and then practice one or two problems. Complete the missing information in the conversation that follows. Round your final answer to all computations to two decimal places. However, if you compute any interest factors as an intermediate step in your calculations, round them to four decimal places. Luke So, what is a present value, and why is it important to be able to calculate it? Lexi According to Dr. Boudreaux, an asset's present or value is the current value of the cash flows that it will pay or receive in the future. Luke Wait! Can you give me an example of when it would be appropriate to calculate a present value? Lexi Sure, but it might make more sense for you to identify such a situation. So, tell me in which of the following two scenarios you would use a present value calculation, and then explain why that is Scenario 1: You would like to know how much you should place on deposit to have accumulated a certain amount of money by a specific future date. Scenario 2: You would like to know how much a given amount deposited today will grow into by a specific future date. Luke Ummm. I think is the situation that requires the calculation of a present value. The reasan is that the amount to be placed on deposit is both and occurs Lexi Very good! So here's your next question: How is the present value of a single amount calculated? Luke It can be calculated by rearranging the fomula that is used in the calculation of a future value. To see this Lexi Wait, wait, wait. Could you show me what you mean by writing it down? , show me how to rearrange the future value formula to solve for a Here is a sheet of paper present value. Luke OK, first, let's write down the equation used to calculate a future value (FV) The Calculation of a Future Value Next, let's rearrange the equation to isolate the present value (PV) term by dividing both sides of the equation by the unknown variable, the PV term, on the left-hand side of the equation: Then, we'll simply rewrite the equation to put the FV-PV x (1+I)N So, does this make sense? e've rearranged the future value equation to solve for the present value Also, notioe that the present value interest factor is the factor. This means that you dont nocessarily need two different interest factor tables for the single cash flow; you can make do using either simply the present value table or the future value of the future value interest as you use it correctly