Answer to Question #314808 in Financial Math for Aditya

Question

Determine the present value of INR 2500 invested today assuming a rate of return of 10%. Define the concept of Present value. Compute- the Present value received one year from now, received at the end of 5 years, received at the end of 10 years. Discuss with reason, which of the three value, is the lowest one

Answer 1

The present value is used to describe how much a future value is worth at the present time given a specific discount rate.

$PV=FV (1+r)^n$

If the future value, FV, is R2500, and the discount rate is 10%, then

i) $PV=R2500(1+0.1)^1$

$PV=R2750$

ii) $PV=R2500(1+0.1)^5$

$PV=R4025.28$

iii) $PV=R2500(1+0.1)^{10}$

$PV=R6484.36$

The present value at the end of one year from now is the lowest. This is because the more the amount the is being compounded, the lesser it is.