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Discounting: Example 1.4.1. How Much Do You Need To Invest Now To Get $2000 After Five

To get $2000 after five years with an interest rate of 4.25%, you need to invest the present value of $1624.24 now. The formula for compound interest relates the capital invested, interest rate, time period, and ending capital. Discounting is moving a payment backward in time so the future value is reduced to its present equivalent amount.

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45 views1 page

Discounting: Example 1.4.1. How Much Do You Need To Invest Now To Get $2000 After Five

To get $2000 after five years with an interest rate of 4.25%, you need to invest the present value of $1624.24 now. The formula for compound interest relates the capital invested, interest rate, time period, and ending capital. Discounting is moving a payment backward in time so the future value is reduced to its present equivalent amount.

Uploaded by

roi_marketing
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Discounting

The formula for compound interest relates four quantities: the capital C at the
start, the interest rate i, the period n, and the capital at the end. We have seen
how to calculate the interest rate (Example 1.2.3), the period (Example 1.2.4),
and the capital at the end (Example 1.2.2). The one remaining possibility is
covered in the next example.

Example 1.4.1. How much do you need to invest now to get $2000 after five
years if the rate of interest is 41 4%?
Answer. One pound will accumulate to (1 + 0:0425)5 = 1:2313466 in five years,
so you need to invest 2000=1:2313466 = 1624:24 pounds.
We say that $1624.24 now is equivalent to $2000 in five years at a rate of 414%.
We call $1624.24 the present value and $2000 the future value. When you move
a payment forward in time, it accumulates; when you move it backward, it is
discounted

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