Question 1 OR (a)
Present value of a future amount
4 marks
- Time to write
- About 8 minutes
- Topic
- Time value of money
Question
Question 1 OR (a) · 4 marksWhat does the phrase "present value of a future amount" mean? How are present values calculated?
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- What…?How…?2 asks, each with its own marks below. Answer both.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Meaning of present value; discounting 2 marks 3 min
- 2 Formula, tables and example 2 marks 3 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Step 1 opens with the meaning: a one-line definition, the quickest mark in it.
Short on time? Trim steps 1 and 2 evenly rather than skip one: each is capped at its own marks.
Try it first. About 8 minutes for 4 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Meaning. The present value of a future amount is what that amount, receivable at a future date, is worth today. Money received in future is worth less than the same sum now, because money in hand can be invested to earn interest. Present value is therefore the exact opposite of compound value: instead of adding interest to a sum invested now, it removes the interest from a sum received later. This process is called discounting.
Calculation. The present value P of a sum A receivable after n years at an interest (discount) rate i is
The factor 1 ÷ (1 + i)ⁿ is the present value factor; tables give it for various rates and periods, so P = A × PV factor. For example, ₹1,000 receivable after 2 years at 10% is worth 1,000 ÷ 1.10² = 1,000 × 0.826 = ₹826 today. For a series of future amounts, the present value of each is found and the results are added.
Where the 4 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Meaning of present value; discounting | 2 |
| 2 | Formula, tables and example | 2 |
| Total | 4 |
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