Practical Financial Management (Textbook) Present value of single sum problem:  You are going to be given $45,000 in 7 years. Assuming an interest rate of 2.5%, what is the present value of this...

Practical Financial Management (Textbook)

Present value of single sum problem: 
You are going to be given $45,000 in 7 years. Assuming an interest rate of 2.5%, what is the present value of this amount?

Expert Answers
pohnpei397 eNotes educator| Certified Educator

The current value of this investment is $37,856.94

To answer this question, we need to use the formula for compound interest, but we need to solve for a different variable than we usually do.  The compound interest formula is as follows:

A = P (1 + r/n)^nt

Where

A = Final amount

P = Principal

R = Interest rate expressed as a decimal

N = number of times per year that the interest is compounded

T = number of years

I am assuming that the interest in this question is being compounded annually.

In this case, we are given all of the information except for the principal.  Therefore, we need to plug in the numbers that we have and solve for P.

45000 = P (1 + .025/1)^7

45000 = P (1.025)^7

45000 = 1.188685P

P = 37856.94