Uses underlying notion of compound
interest to determine the amount that we
must have now in
order to have say $1000.00 six years from now, assuming 5
percent rate of
interest. Solving for P in
F = P(1 + i)n
we get
P = F __1___
(1 + i)n
Here,
P = $1000 __1___
(1 + 0.05)6
= $1000(0.7462)
= $746.20
The factor, 0.7462,
is referred to as the Òsingle payment present worthÓ factor
for 5 percent
and 6 years ( see Table 1, next slide).