What is the value of the following future amount?
a)RM800 to be received 10 years from now discounted back to present at 10%.
b)RM1, 000 to be received 8 years from now discounted back to present at 3%.
To calculate the present value of a future amount, we need to use a financial concept called discounting. Discounting is the process of determining the present value of a future cash flow by applying a discount rate to it. The discount rate represents the rate of return or interest rate that we require in order to be willing to wait for the future amount.
a) To calculate the present value of RM800 to be received 10 years from now discounted back to the present at a rate of 10%, you can use the formula for present value (PV):
PV = FV / (1 + r)^t
Where:
PV = Present Value
FV = Future Value
r = Discount Rate
t = Time (in years)
In this case:
FV = RM800
r = 10% or 0.10 (decimal)
t = 10 years
Using the formula, we can calculate the present value:
PV = RM800 / (1 + 0.10)^10
= RM800 / (1.10)^10
= RM800 / 2.5937
≈ RM308.91
Therefore, the present value of RM800 to be received 10 years from now, discounted back to the present at 10%, is approximately RM308.91.
b) To calculate the present value of RM1,000 to be received 8 years from now discounted back to the present at a rate of 3%, we can use the same formula:
PV = FV / (1 + r)^t
In this case:
FV = RM1,000
r = 3% or 0.03 (decimal)
t = 8 years
Using the formula, we can calculate the present value:
PV = RM1,000 / (1 + 0.03)^8
= RM1,000 / (1.03)^8
= RM1,000 / 1.2609
≈ RM793.90
Therefore, the present value of RM1,000 to be received 8 years from now, discounted back to the present at 3%, is approximately RM793.90.