The Present Value of a Single Amount - Business Finance - ثاني ثانوي

Link to digitalestep www.en.edu.sa 5.4 The Present Value of a Single Amount Key Term Present value Present value The current value of luture sum of money given a specified rate of retur Sometimes a person might want to know the amount to set aside today that will grow to an amount in the future. The calculations for time value of money may be used to determine the current value of an amount desired in the future. Present value is the current value of a future sum of money given a specified rate of return. Present value calculations, also called discounting, determine how much to deposit now to obtain a desired amount in the future. p202Business Finance M Where: FV Future Value PV = Present Value PV= FV (1+) i = Interest rate n = Number of time periods Present value calculations are often used by a business to determine the current worth of future cash flows from company operations. Other.common uses of present value of a single amount include: ⚫ Determining an amount to deposit today to achieve a certain financial goal in the future. ⚫ Comparing different investments based on discounting the potential future returns. Discounting potential future cash flows of a business to decide if a new product would be profitable for the company.

EXAMPLE What is the present value of SAR 100 to be received three years from now based on a 10% rate? SAR 75 SAR 83-SAR 83- -SAN SAR 75 -SAR P Discount Onterest! SAR 8 Present value (rounded) SAR 83 SAR 91 SR 91-548010 -SAH 915 -SARI Discount interest) SAR 8 SAR IDO-SAR 10-10 SAR 100-SANS =SAR 9 Discount interest SAR 9 SAR 100 3 Year end In this example, the calculation involves determining the present value of SAR 100 to be received three years from now based on 10%, which may be calculated as follows: Presed Valur of *Single Atawat Pencasskysten Calcitafim Formula Financial Calculator (Note: Different financial calculators may require slightly different keystrokes) EV PV= 75- 100 (+00 FV LINIY, PM1 CPT PV 100 FV 3 N.10 1/Y 0 PMT CPT PV 75 Spreadsheet =PV IRATE. NRER, PMT, PV, TYPE) =PV (0,1 3,0-100,0)-75 وزارة التعليم CHAPTER Opportunity Costs and the Time Value of Money 203

p204Business Finance You Try It Khalid's goal is to have SAR 1,000 five years from now. If his investment earns 5%, what amount would he need to invest today? All wants to have SAR 2.000 six years from now. If his investment account pays 4% per year, how much does he need to invest today? Nora's goal is to have SAR 2,000 in four years. time. She can either invest in an account which pays 4% or one that pays 5%. What is the difference between the present value amounts of the two accounts? Exercises Choose the correct answer. 1. A present value calculation is referred to as compounding. True/False 2. If you want to have SAR 5,000 in three years! time and your investment account eams 4% each year, how much do you have to deposit into your account now?