Student

Learning Future and

Centre Present Values
If you borrowed $1,000 from a friend for 3 years, how much would you pay them back?
Would you feel bad if you paid only the $1000 three years from now?
Just leaving that money in the bank to earn interest at 7% would amount to $1000(1.07)3 = $1225.05

The original $1000 dollars is called the Present Value

(PV) as it is the value now at the present time.

t=0 t = 1year t = 2 years t = 3years

P = $1000 1000(1.07) 1000(1.07)2 1000(1.07)3

= $1070 = $1144.9 FV = 1225.05

The value in 3 years time is called the Future Value (FV) as

this is how much the money will be worth in the future.

The concepts of present value (PV) and future value (FV) are based on the time value of money. The time value of
money is the idea that, quite simply, money received today is worth more than money to be received one year from
today (or at any other future date), because it can be used to earn interest. If you invest $1,000 today at 10 percent, you
will have $1,100 in one year. So $1,000 in one year is worth $100 less than $1,000 today because you lose the
opportunity to earn the $100 in interest.

What is the future value of $1000 in 6 years time at 6% pa?

Step 1: Write down everything that you know Sn = Future value = ?
P = Present Value = $1000
i = annual interest rate = 6/100 = 0.06
n = number of years = 6 years

Step 2: Write down the formula Sn = P(1 + i)n

Step 3: Apply the formula Sn = $1000(1+0.06)6

Step 4: Work out the formula starting with brackets followed by exponents then multiplication (BODMAS)

Step 5: Answer two decimal places $1418.52

What about if we know the future amount and not the present value?

𝑆𝑆𝑛𝑛 = Future value = 1418.52

P = Present Value = ?
Step 1: Write down everything that you know
i = annual interest rate = 6/100 = 0.06
n = number of years = 6 years
Sn
Step 2: Rearrange the formula P=
(1 + i)n
1418.52
Step 3 & 4: Apply the formula and BODMAS P=
(1.06)6

Step 5: Answer to two decimal places P = $1000.00

Present & Future Values 5/2013 © SLC 1 of 2

 Examples
From our original equation we must factor in time:
Sn=Future Value
Sn Sn P = Present Value
P= becomes P=
(1 + i)n (1 + 𝑡𝑡𝑖𝑖 )n i = annual interest rate
n = number of periods per year n= k*t
𝑖𝑖
and Sn = P(1 + i)n becomes Sn = P(1 + )n t = number of compounding periods in a year
𝑡𝑡
k = no. of years

Example 1: FV Compounding Quarterly

What is the future value of $10,000 in 10 years time at 7% pa compounded quarterly?

Step 1: Write down everything that you know Sn = Future value = ?

P = Present Value = $10,000
i = annual interest rate = 7%/100% = 0.07
k = number of years = 10years
t = 4 quarters in a year
n = k*t = 4*10 = 40 quarters in 10 years

𝑖𝑖
Step 2: Write down the formula Sn = P(1 + )n
𝑡𝑡
0.07 40
= 10000(1 + )
4

Answer = $20,015.97

Example 2: PV Compounding Weekly

What is the present value of a payment of $100,000 in 5 years time at 6% pa compounded weekly?

Step 1: Write down everything that you know P=?

i = 0.06
S = 100,000
t = 52
k = 5 years
n = k*t = 5*52 = 260

Step 2: Write down the formula Sn

P=
(1 + 𝑡𝑡𝑖𝑖 )n
100,000
= .06 260
1+
52

Answer = $74, 094.64

Present & Future Values 5/2013 © SLC 2 of 2