Present Value of Single Cash Flow for Multiple Period Investment with Simple Interest

Present Value of Single Cash Flow for Multiple Period Investment with Simple Interest

Present Value with a Single Cash Flow:

Present value (PV) is the current value of a single future cash flow discounted at the appropriate discount rate.

Time value of money for a single cash flow is a cash inflow or outflow that investors or lenders received from or paid to once respectively for specific periods

There are often four parts to equation (time value of money for a single cash flow): the present value (PV), the future value (FV), the discount rate (r), and the number of periods of the investment (t). If three of these (FV, r and t) are given, so we can find the present value (PV).

Multiple-Period Investment:

Multiple-period investment may be investment for more than one year. Term multiple-period can refer to more than one day or one month investment, so it isn’t always more than one year investment.

If period investments are based on one day, one month or one year etc., so discount rates are based on one day, one month or one year respectively.

Definition of Simple Interest:

 Simple interest means the interest is not reinvested, so interest is earned each period only on the original present value or principal.

Formula of simple interest future value for Multiple-Period Investment:

FV= PV x ( 1 + rt) 

So PV = FV/(1+rt)

PV: Present Value or principal is worth today

FV: Future value is worth in the future

r : Interest rate, rate of return, or discount rate per period , but not always one year.

t : time is referred to number of periods of investment

Question

Suppose you need $10,000 in five years to buy car. If you can earn 48 percent as simple interest. How much do you have to invest today to get car?

Solution

PV=FV/(1+tr)=10,000/(1+5*0.48)=10,000/3.4=$2,941

The amount that you invest today is $2,941, and after 5 years, you will get $10,000.