To find the present value (PV) of an amount that you will receive in the future, you can use the present value formula, which is:
PV = FV / (1 + r)^n
Where:
- FV = Future Value ($10,000 in this case)
- r = discount rate (5% or 0.05)
- n = number of years until the amount is received (5 years)
Plugging in the values:
PV = 10000 / (1 + 0.05)^5
First, calculate (1 + 0.05)^5:
When calculated, (1 + 0.05)^5 ≈ 1.27628
Now, we substitute this back into the formula:
PV ≈ 10000 / 1.27628
Finally, calculating that gives us:
PV ≈ 7820.34
This means that the present value of $10,000, to be received at the end of 5 years, discounted at a rate of 5% per year, is approximately $7820.34.