ECON 0110 Lecture 12: 09 PRESENT VALUE.DOC

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1 Nov 2015
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Assume i owe you ,000 one year from today. Assume you can invest money at an annual interest rate i = 10% Pv = present value of the debt = amount i should give you today. You could invest it for 1 year at 10% interest. You could invest pv for one year at i = 10% After one year, you would get 10% interest and would have. Pv + . 10 pv = pv x (1. 10) Thus, the amount pv should be the solution of. I should give you an amount pv today so that in one year you would have. Therefore, the amount i should give you today is. General case for money due in one year. F1 = amount owed in one year i = interest rate. Suppose i owe you ,100 in two years. Pv x (1. 10) = result after investing the amount pv for one year.

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