Chapter 16, Problem 1VQP

To determine

Explain the present value of dollar amount.

Explanation of Solution

Future value (FV) is $1,000. Interest rate (i) is 5%. Time period (n) is 2. Present value (PV) can be calculated as follows:

$\begin{array}{c}\text{PV}=\frac{\text{FV}}{{\left(1+\text{i}\right)}^{\text{n}}}\\ =\frac{1,000}{{\left(1+0.05\right)}^{\text{2}}}\\ =\frac{1,000}{1.1025}\\ =907.029\end{array}$

Then, the present value of dollar amount is $ 907.03.