The present value concept is used to determine how much to invest today to reach a future amount.

The present value concept is used to determine how much to invest today to reach a future amount.

• A. Present value
• B. Discounting
• C. Compounding
• D. Inflation

Answer: (A)

Present value is the value today of a future amount given a required rate of return. When you want to know how much to invest now to reach a specific target later, you’re applying the present value concept. You bring that future sum back to today by discounting it: divide the future amount by (1 plus the rate) raised to the number of years. For example, to have 1,000 in five years at 5% per year, you’d need about 783.53 today. That amount today is the present value of the future goal. Discounting is the calculation method used to find present value, while compounding describes how money grows forward with interest, and inflation refers to rising prices that can erode purchasing power.

Present value is the value today of a future amount given a required rate of return. When you want to know how much to invest now to reach a specific target later, you’re applying the present value concept. You bring that future sum back to today by discounting it: divide the future amount by (1 plus the rate) raised to the number of years. For example, to have 1,000 in five years at 5% per year, you’d need about 783.53 today. That amount today is the present value of the future goal. Discounting is the calculation method used to find present value, while compounding describes how money grows forward with interest, and inflation refers to rising prices that can erode purchasing power.