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Time Value of Moneybeginner
TVM Single Sum
Find present value from a future amount using basic discounting.
Problem Scenario
You will receive $2,000 in 4 years. Your required return is 7%.
Given Data
Future value$2,000
Rate7%
Periods4
Requirements
- Compute PV
- Interpret the result
Solution
Step 1:
Identify formula: PV = FV/(1+r)^n.
Step 2:
Substitute values: PV = 2000/(1.07)^4.
Step 3:
Compute (1.07)^4 = 1.3108. PV = 2000/1.3108 = 1,525.87.
Final Answer
PV ≈ $1,525.87
Key Takeaways
- ✓Always draw a timeline first
- ✓Rate per period must match n
Common Errors to Avoid
- ✗Using 7 instead of 0.07
- ✗Forgetting to raise to the power of n
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Common questions about this problem type
Keep extra decimals until the final step to avoid rounding error.
Divide the APR by 12 to get the monthly rate and multiply the years by 12 for periods. Always match the rate period to the compounding frequency.