G H 1 J L M N 0 20 01 221 23 Instructions: Read this, then proceed through the information and cells to the right Background: The present value formula is essentially the opposite of the future value formula. It looks at amounts to be received in the future and puts them into terms of today's dollars assuming they were invested at a constant rate. The formula for discounting an amount by one year is: Present Value (Future Value)/(1+ Applicable Rate) Multiple Years Much like the future value formula this equation is commonly applied to cash forecasts several years in the future. Once again, you can apply this formula with inconsistent applicable rates like so Present Value (Future Value)/(1+ Yr 1 Rate)(1 +Yr 2 Rate)(1 + Final Rate) Assuming Consistent Rates Once again, it's very common to do this analysis assuming an average rate of return over the time frame to simplify the computation. When you're attempting to discount for multiple years (5 In this example) at a consistent rate (8%) the formula simplifies to: Present Value (Future Value)/(1+08) Discount this amount back 1 year Future Value 10000 Applicable Rate 0.05 1 Years Present Value: $ 9,523.81 Correct Bob thinks the economy is going to get weird in 3 years and wants to have funds available to invest to take advantage of shifting conditions. He wants to have $10,000 available in 3 years and wants to know how much he must invest now to make that happen. In year one he plans on leaving his money in a savings account that pays out 25% interest annually In year 2 he expects to be sick of that kind of rate of return and plans to invest in the stock market. He projects a rate of return of 9% but realizes it could range from -30% to 40% In year 3 he expects the stock market to offer a return of 8% but wants to put his money into more liquid investments which only offer a rate of return of 6% 24 25 26 27 28 29 30 31 32 33 34 35 Pick out the relevant information Future Value Wr1 Applicable Rate Yr 2 Applicable Rate $10,000.00 Correct 9% Correct 6% Correct Yr 3 Applicable Rate Compute the amount that needs to be invested today Present Value $ 11,554.00 Incorrect