Used Symbols

PV = Present Value

FV = Future Value

n   = The discounting period

r   = the discount rate/interest rate

  1. To what present value would $20,000 received in five years, assuming an annual discount rate of 5%?

PV = FV/(1+r)n

= 20,000/(1 + 5%)5

Present Value = $15,670.52

  • Benefits received in the future are adjusted to their present value (discounted) because:
  • they are uncertain.
  • the future may never come, or may come under unforeseen circumstances.
  • markets indicate that people need to be compensated for postponing the enjoyment of benefits
  • None of the above is true.
  • You won a $1,000,000 in the Hoosier Lottery.  You can tell your instructors what you really think of them, quit school, quit your job and never have to work another day in your life.  You are a free person.  Are you really?

Your decision with your lottery winnings has 2 options.

  1. Take $50,000 per year for the next 20 years
  2. Take the Cash Option.  You know that cash today is worth more than...