Answer :
We must you invest now in a savings account that earns 12% per year if we would like to have $2500 in 7 years is approx. $804.93.
What do you mean by present value?
Present value (PV) is current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or debt obligations.
The discount rate is the investment rate of return that is applied to present value calculation. In the other words, discount rate would be the forgone rate of return if an investor chose to accept an amount in the future versus the same amount today. The discount rate that is chosen for present value calculation is highly subjective because it's the expected rate of return you'd receive if you had invested today's dollars for a period of time.
The discount rate is the sum of time value and a relevant interest rate that mathematically increases future value in nominal or absolute terms. Conversely, discount rate is used to work out future value in terms of present value, allowing a lender to settle on the fair amount of any future earnings or obligations in relation to the present value of capital. The word "discount" refers to future value being discounted to the present value.
Present value = 2500 * Present value of the discounting factors (rate%, time period)
=2500/[tex]1.12^{ {10}[/tex]
=2500*0.321973237
=804.93 approx.
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