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State the Example to calculate the present value
2, 00,000 $ is the amount which you require after 20 years for your retirement. How much must you invest now at 5% per annum compounded yearly?
Solution
Here i = 0.05, FV = 2, 00,000, and n = 20. Putting it in the formula we get:
Present value = 200000 / (1+0.05)20
Solve this or use present value table.
Using present value interest factor table we find that present value of 1 $ of 20 years from now at 5% interest is 0.3769. Multiplying it with future value 2, 00,000 $ we get:
PV = 2, 00,000 x 0.3769 = 75,380 $
Matching or Accrual The accrual concept makes a distinction among the receipt of cash and the right to receive it, and the payment of cash and legal obligation to pay it.
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