Page 336 - F2 - MA Integrated Workbook STUDENT 2018-19

Chapter 14

2.5 Discounting

Discounting performs the opposite function to compounding. Compounding finds the
future value of a sum invested now, whereas discounting considers a sum receivable
in the future and establishes its equivalent value today. This value in today’s terms is
known as the Present Value.

Present value Future value

Formula for discounting:

Future value (V)
Present value (X) = ————————
n
(1 + r)

This can be shown as:

1
Present value (X) = Future value (V) × ———

(1 + r) n

Or
-n
Present value (X) = Future value (V) × (1 + r)

–n
n
Where 1 ÷ (1 + r) or (1 + r) is known as the discount factor
2.6 Present value tables

-n
The discount factor, (1 + r ) can be looked up in present value tables.
On the present value table, look along the top row for the interest rate and down the
columns for the number of years, where the two intersect you can read off the
discount factor.

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