How do you response to the discussion post below from a classmate. Please provid

Question

How do you response to the discussion post below from a classmate. Please provide answer and reference. Thank you in advance.

Example from research; let’s assume that I receive $1000 at the end of two years. How do I calculate the present value of the amount, assuming the interest rate is 7.5% per year compounded annually?

PV = 1000 X (1/ 1.155625)

PV = 1000 X (.86533261) or (.87)

PV = $865.33

This calculations confirm that when I receive $1000 within two years is the same as receiving $865.33 at the beginning of the two years. When the TVM is 7.5% per year compounded annually.   

Reference

Jordan, B., Ross, S., & Westerfield, R. (2013). Fundamentals of Corporate Finance (10th ed.). Irwin: McGraw-Hill

Explanation / Answer

The formula given in the exercise to calculate the present value of future sum is correct. Future value if discounted at the interest rate given (7.5%) , the resulting answer will be present value at Year 0 ($865.33) which is equivalent to Future value receivable at the end of Year 2 ($1000)

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