Single Payment Present Worth Amount Method
Single-Payment Present Worth Amount
Here,
the objective is to find the present worth amount (P) of a single future sum
(F) which will be received after n periods at an interest rate of I compounded
at the end of every interest period.
Cash flow diagram of single-payment present worth amount
The formula to obtain the present worth is
P = F / (1
+ i)n = F (P/F,
i, n)
Where
(P/F, i,
n) is termed as single-payment present worth factor.
Example problem of single-payment present worth amount
A person wishes to have a future sum of Rs 5,00,000
for his sons education after 12 years from now. What is the single payment that
he should deposit now so that he gets the desired amount after 12 years? The
bank gives 10% interest rate compounded annually.
Given data
F = Rs. 5,00,000
n = 12
years
i = 10%
To find
P
Formula used
P = F (P/F,
i, n)
Solution
P = F (P/F, i, n)
= 5,00,000 (P/F, 10%, 12)
= 5,00,000 * 0.3186
P = Rs. 1,59,300
Result
A person should deposit
Rs. 1,59,300 now 10% interest rate. So that he gets the desired amount after 12
years.
