Page 248 - Microsoft Word - 00 ACCA F2 Prelims.docx

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
How much would $5,000 receivable in 3 years’ time be worth today if
the interest rate is 8%?

X =

242