Money Instructor Home Basic Money Skills Lessons Earning and Spending Money Lessons Saving and Investing Money Lessons Interactive Money Lessons Suggestions and Requests

 FINANCE PRESENT VALUE CALCULATION - MONEY USING FORMULA DEFINITION NET EQUATION FIGURING COMPUTATION MATH BEGINNERS PRINCIPLES BASICS 101 LEARNING PERSONAL COURSE GUIDE EDUCATION

 

 

Learn finance basics -- how to use present value or money calculations.
 

PRESENT VALUE

 

Present value refers to today’s value of a future amount.

 

Present Value Formula:

      S
P = ------------
      (1+rt)

  

 

Instead of beginning with the principal which is invested, you could start from what you want to accumulate in the future, and then work backward to see the amount that you must invest to reach the required amount.

 

  

 

 

 

 

 

 

 

CALCULATING PRESENT VALUE

 

For example, if you wish to retire within a certain number of years you can begin working in reverse to determine what amount must be invested today to accumulate the desired amount at the time of your retirement in the future.

 

Example

Assume you need $20,000 in three years for a down payment on a house. If the simple interest rate is 5%, how much would you have to invest today to accumulate the $20,000 in three years?

 

In this example:

S= $20,000 (amount of maturity value)
t = 3 years
r = 0.05

 

The calculation for principal is:

          S
P = ----------
       (1+rt)

 

       $20,000
P = -------------
    [1 + (0.05)3]

 

       $20,000
P = -------------
          1.15

 

 

P = $17,391.30

 

 

Therefore, if you invest $17,391.30 today at 5% simple interest, you will have $20,000 in three years.

 


Let’s check it out:
Interest per year = $17,391.30 x 0.05 = $869.57
Interest for three years = $869.57 x 3 = $2,608.70


Therefore, the amount available for down payment at the end of three years is $17.391.30 + $2,608.70 = $20,000

 

 

Instead of 5% simple interest, consider 5% compound interest payable semiannually:


Formula to be used:
P = S(1+i)^-n

 

S = 20,000
i  = 0.05 / 2 = 0.025
n = 2 x 3 = 6

 

 

P = $ 20,000(1+0.025)^-6


   = $ 20,000(1.025)^-6


   = $ 20,000 x   1
                     ---------
                     (1.025)^6

 

= $ 20,000 / 1.16


= $ 17,241.38

 


Let’s check it out using the compound interest formula:


S = P(1 + i)^n
   = $ 17,241.38(1 + 0.025)^6
   = $ 17,241.38(1.025)^6
   = $ 17,241.38 x 1.16
   = $ 20,000

 

 

 

For teaching and learning about investing:

 TEACHING INVESTING LESSONS
All about investing your money and money management. Learn basic investing principles and financial concepts.  Including buying stocks, the stock market, interest, income statements. Lessons, lesson plans, and worksheets.

 

 

 

Back to more finance and investing

 

 

To teach and learn more money skills, personal finance, and money management, please go to the Money Instructor home page.

 
 
 

Calculate and compute Net Present Value - Teaching students investing money basics - Teachers High School Secondary education Help - Practical Curriculum Theme - Dummy - Wealth - School Classroom - Present Value of Money rate math Formula define online calc

© 2002-2005 Money Instructor