Explain present Value in mathematics

Explanation:

What would you prefer to receive $1,000 today or the same amount in a year?

What would you prefer to receive $1,000 today or $1,200 in a year?

What if I ask to choose between $,1000 today and $1,050 in a year?

The present value is the amount of money today that is financially equal to an amount of in the future.

How can you mathematically calculate the present value?

Assume you are offered $1,000 in a year, how much money does it represent today?

That depends on the opportunities that you have to do with the money. Let's say that you can invest your money today in a business that gives you a 10% return in a year. This is, r = 10%.

To calculate the value in a year of an investment today, you would multiply your investment for 1 + 10% = 1 + 0.01 = 1.01. This is:

         Value today          Value in a year

         $1,000                   $1,000 × 1.10 = $1,100

That means that $1,100 in a year are equal to $1,000 in the present. Hence, the present value of $1,100 in a year is $1,000.

In general, the present value is the value of a future amount of money discounted at the rate of return expected.

But it also depends on the number of years elapsed. If it is 2 years you have to discount it two times, this is divide the value in two years by (1+r) two times:

For a number n of years, you obtain:

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step-by-step explanation:

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step-by-step explanation: