How do you response to the following discussion post below from a classmate? Ple
ID: 2816465 • Letter: H
Question
How do you response to the following discussion post below from a classmate? Please porvide an answer and reference. Thank you in advance!
What is the relationship between Present Value and Future Value?
According to Ross, Westerfield, & Jordan (2013) the value you need to invest to reach a certain dollar amount in t number of years at r interest rate is the present value, whereas the future value is the value you will obtain by investing y dollars in x number of years at z interest rate. Both of these scenarios are looking at similar, nearly identical calculations. The difference is whether or not we are looking at the value we need to invest now or the value we will obtain in the future based on our current investments. Ross, Westerfield, & Jordan (2013) said, "the present value factor is just the reciprocal (that is, 1 divided by) the future value factor," (p. 134).
What are the calculations involved with PV and FV?
Based on the fact that the present value factor (PV) is the reciprocal of the future value (FV) the calculations look relatively similar.
PV = 1/(1+r)t
FV = (1+r)t
In order to better understand these equations the terminology reads as follows:
PV - Present Value
FV - Future Value
r = interest rate
t = period of time
Both equations can be used in single instance cases, or over a longer time span (multiple periods).
How can you apply these concepts to a personal or business situation you are familiar with – please explain and support with terms and concepts from this class material?
For the sake of providing an example, and not having much experience when it comes to the information presented in this module, we will use saving money to pay off a student loan. I know that I will have plenty of experience with this in just a year! (unfortunately). Lets say I am depositing money into an account that gives has a 5% interest rate annually, and I want to reach $5,000 in just 5 years. How much money would I need to put in today in order to reach my goal?
1+r (5% of every dollar)
1+.05 = 1.05
$5,000 = PV x 1.055
$5,000 = PV x 1.28
---------- -------------
1.28 1.28
$3,906.25 = PV
According to the calculations, and information available, I would need to invest $3,906.25 into my account today in order to reach $5,000 in 5 years.
Reference
Ross, S. A., & Westerfield, R. W., & Jordan, B. D. (2013). Fundamentals of corporate finance (10th ed.). New York, NY: McGraw-Hill Irwin.
Explanation / Answer
1. According to Ross, Westerfield, & Jordan (2013) the value you need to invest to reach a certain dollar amount in t number of years at r interest rate is the present value, whereas the future value is the value you will obtain by investing y dollars in x number of years at z interest rate. Both of these scenarios are looking at similar, nearly identical calculations. The difference is whether or not we are looking at the value we need to invest now or the value we will obtain in the future based on our current investments. Ross, Westerfield, & Jordan (2013) said, "the present value factor is just the reciprocal (that is, 1 divided by) the future value factor," (p. 134).
2.
Based on the fact that the present value factor (PV) is the reciprocal of the future value (FV) the calculations look relatively similar.
PV = 1/(1+r)t
FV = (1+r)t
In order to better understand these equations the terminology reads as follows:
PV - Present Value
FV - Future Value
r = interest rate
t = period of time
Both equations can be used in single instance cases, or over a longer time span (multiple periods).
3.
For the sake of providing an example, and not having much experience when it comes to the information presented in this module, we will use saving money to pay off a student loan. I know that I will have plenty of experience with this in just a year! (unfortunately). Lets say I am depositing money into an account that gives has a 5% interest rate annually, and I want to reach $5,000 in just 5 years. How much money would I need to put in today in order to reach my goal?
1+r (5% of every dollar)
1+.05 = 1.05
$5,000 = PV x 1.055
$5,000 = PV x 1.28
---------- -------------
1.28 1.28
$3,906.25 = PV
According to the calculations, and information available, I would need to invest $3,906.25 into my account today in order to reach $5,000 in 5 years.
Reference
Ross, S. A., & Westerfield, R. W., & Jordan, B. D. (2013). Fundamentals of corporate finance (10th ed.). New York, NY: McGraw-Hill Irwin.
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