Present Value
What money arriving later is worth today, at a stated discount rate.
Pen and paper is fine · no calculator needed why?
Opens at level 32.
Lesson and untimed practice
Read the full lesson and try each skill without a clock. About 3 minutes to read.
skills · practice stats
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Present value, one year out not tried yet
worked example
Assume a 25% annual discount rate. What is $375 received one year from now worth today?
Answer: $300.00
- Present value reverses growth: divide by 1 + the rate.
- $375 ÷ 1.25 = $300.
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Present value, two years out not tried yet
worked example
Assume a 20% annual discount rate. What is $12,528 received two years from now worth today?
Answer: $8,700.00
- Divide by 1.2 twice, or by 1.2² = 1.44 once.
- $12,528 ÷ 1.44 = $8,700.
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Money now or money later? not tried yet
worked example
Offer A: $2,900 now. Offer B: $3,045 in one year. Assume a 5% annual discount rate. Which is worth more today?
- Offer B (money later)
- They're worth the same today
- You can't compare money at different dates
- Offer A (money now)
Answer: They're worth the same today
- Bring B back to today: $3,045 ÷ 1.05 = $2,900.
- That equals Offer A's $2,900, so they're worth the same today.
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Discount factor not tried yet
worked example
Assume a 100% annual discount rate. What is the discount factor for money received in 2 years? Round to 3 decimal places if needed.
Answer: 0.25
- Factor = 1 ÷ 2² = 1 ÷ 4 = 0.25.
- Multiply any future amount by it to get today's value.
rest ladder
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