To calculate the present value (PV) of a future payment, we use the present value formula:
PV = FV / (1 + r)^n
Where:
- PV = Present Value
- FV = Future Value (the amount of money in the future)
- r = discount rate (as a decimal)
- n = number of years until payment
In this case:
- FV = 7,000
- r = 0.04 (which is 4 percent)
- n = 6
Now, we can plug the values into the formula:
PV = 7,000 / (1 + 0.04)^6
Calculating the denominator:
(1 + 0.04)^6 = 1.265319
Now, substituting back into the PV formula:
PV = 7,000 / 1.265319 ≈ 5,528.64
So, the present value of a $7,000 payment made in six years at a 4 percent discount rate is approximately $5,528.64.