How to Calculate Present Value with 4 Per Cent Interest Rate
Question:
If you want to know the present value of $10,000 received in 1 year, and the interest rate is 4 per cent, what formula can you use?
A. Present value equals $10,000 times 0.04.
B. Present value equals $10,000 divided by 1.04.
C. Present value equals 1.04 divided by $10,000.
D. Present value equals $10,000 times 1.04.
Answer:
The correct formula to calculate the present value of $10,000 to be received in 1 year given a 4% interest rate is 'Present Value = Future Value / (1 + Interest Rate) ^ Number of Periods'. Thus, the present value will be $10,000 divided by 1.04.
Explanation:
The question is related to the concept of the time value of money, specifically present value. This is a fundamental concept in Finance and is used frequently when evaluating investments or loans. In this scenario, you want to find the present value of $10,000 that will be received in the future, given an interest rate of 4% per annum. The second answer choice you provided is the correct formula:
Present value equals $10,000 divided by 1.04
This formula reflects the present value formula, which is: Present Value = Future Value / (1 + Interest Rate)^Number of Periods. In this case, the future value is $10,000, the interest rate is 4% (or 0.04), and the number of periods is 1 year. After applying these values to the formula, you'll get the present value of $10,000 to be received in 1 year.