You will receive Sh. 20,000 five years from now. The discount rate is 8 percent. What is the value of your investment today?
To find the value of your investment today, you need to calculate its present value. The present value represents the current worth of a future cash flow, taking into account the time value of money.
Here's how you can calculate the present value of your investment:
1. Determine the future value (FV) of your investment, which is Sh. 20,000.
2. Identify the time period in years, which is five years (n = 5).
3. Determine the discount rate, which is 8 percent (r = 8%).
The formula to calculate the present value (PV) is:
PV = FV / (1 + r)^n
Using the above formula, substitute the values:
PV = 20,000 / (1 + 0.08)^5
Now, we can calculate the present value of the investment:
PV = 20,000 / (1.08)^5
PV = 20,000 / 1.46933
PV = 13,615.35
Therefore, the value of your investment today is Sh. 13,615.35.