Q19RQ - Horngren'S Financial And Managerial Accounting

Question

How is the present value of a lump sum determined?

Step-by-Step Solution

Answer

Answer

$PV=FV\frac{1}{{\left(1+r\right)}^{°}}$

Step 1: Meaning of Present Value

Present value compares the acquiring control of a future dollar to that of a current dollar. It is a money-related calculation that gauges the worth of a future amount of cash or stream of installments in today's dollars adjusted for interest and inflation.

Step 2: Determination of the present value of a lump sum.

The following formula is used to calculate the present value (PV) of a lump sum: PV factor for future value for interest rate and time.

  In which the future value FV is divided by a factor of 1 + I for each interval between present and future dates.

 To calculate the PV, enter these figures into the present value calculator:

 FV stands for the sum of future values.

 “n” in the formula is the number of time periods (years).