How do I calculate a present value?
7,000 in 5 years at a quarterly discount rate of 6%
I have looked at the material, but I am confused.
Thank you
Calculating present value involves discounting future cash flows to their current value, taking into account the time value of money. In this case, you want to find the present value of receiving $7,000 in 5 years at a quarterly discount rate of 6%.
To calculate the present value, you can use the formula:
PV = FV / (1 + r)^n
Where:
- PV is the present value
- FV is the future value (in this case, $7,000)
- r is the discount rate per period (in this case, the quarterly discount rate of 6% needs to be converted to a quarterly decimal rate by dividing it by 100, resulting in 0.06/4 = 0.015)
- n is the number of periods (in this case, 5 years, which corresponds to 5 * 4 = 20 quarters)
Now you can substitute the values into the formula:
PV = 7000 / (1 + 0.015)^20
Simplifying:
PV = 7000 / (1.015)^20
PV ≈ 7000 / 1.363592733
PV ≈ 5130.27
Therefore, the present value of receiving $7,000 in 5 years at a quarterly discount rate of 6% is approximately $5,130.27.