WFU Law School
Law & Valuation
1.1.1 Present value and future value

1.1.2 Computing Present and Future Values

It used to be that computing present and future values involved mind-numbing calculations using imprecise financial tables. Today calculators and computer spreadsheets significantly simplify the human task by turning the many calculations over to silicon chips. Quick and accurate present value computing has revolutionized our financial world. For example, hostile takeovers became viable around 1985 when it became technologically feasible to quickly compute yields on junk bonds, a vehicle by which bidders could acquire a company using the company's own cash flows.

Look at the attached tables, created with a spreadsheet:


From the future value table, you will notice that $1 invested at 12% interest for 5 years (assuming annual compounding) becomes $1.7623. How much would you have in your bank account if you had deposited $100 and waited 25 years, assuming the account pays 8% interest compounded annually? Answer: $684.85 (the power of compounding!)

From the present value table, you will notice that $1 in 15 years has a value today of only $0.2394, assuming the interest rate is 10%. That is, $0.2394 (24 cents) invested for 15 years at an annual compound interest of 10% will grow to $1.00 after 15 years.

Example:

It is 1889 and you have come into a nice inheritance from your great aunt. You consider traveling to Paris and looking into the new "impressionistic" art scene - which you have heard is quite interesting.

Your trip would cost $400 and you would have $100 to buy a painting. Somebody mentions there is a colorful painting of irises by an obscure, apparently mentally unstable artist who lives in Arles. Or you could stay home and invest your $500 in the booming market in railroad stocks. (More>>)

 

1.1.1 Present value and future value

©2003 Professor Alan R. Palmiter

This page was last updated on: March 2, 2005