3.2 Present Values
A rand today is worth more than a rand at a future time. This is the essence of the concept of time value.
An investment offers the opportunity to receive R100 one year from now if R90 is paid immediately. Should an investor who applies a 12% discount rate make the investment?
PV = FV(1+r)n = 100(1.12)1 = R89.29
As this is less that the cost of the investment of R90, it is not worthwhile.
An investment offers to opportunity to receive R100 in ten years’ time. If an investor applies an interest factor of 12%, what is the highest price which will be offered for the investment.
PV = FV(1+r)n = 100(1.12)10
= R32.20
The investor would therefore be prepared to pay any amount up to R32.20 for the investment, or we would use this formula:
PV = FV x [1(1+r)n] = R100 x [1(1+r)n] = R100 x 0.3220 = R32.20
Table C reflects discount factors for all commonly used ranges of interest rates and periods which is referred to as the present value of R1 table or PVIF.