Question 2.1.1: What is the present value of $100.00 to be received three ti...
What is the present value of $100.00 to be received three time periods from now if the time value of money is 0.10?
Since (1.10)^{-3} = 0.7513, the present value of $100 is
PV = $100(0.7513) = $75.13.
If $75.13 is invested at time 0, the following interest growth takes place with a 0.10 interest rate.
| Time | Investment at Beginning of Period | Interest | Investment at End of Period |
| 0 | $75.13 | $7.51 | $ 82.64 |
| 1 | 82.643 | 8.264 | 90.907 |
| 2 | 90.907 | 9.091 | 100.000 |
If investors can earn 0.10 per period and can borrow at 0.10, then they are
indifferent to $75.13 received at time 0 or $100 at time 3.
The present value of a series of cash flows is the sum of the present values of each of the components.
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