lostwithmath said:
I'm a little confused on how the present value formula went from
P=A/(1+r/n)^nt
to P= f / (1+ i)^n when you go to solve the problems, I just want to know the steps inbetween the formula change . The original problem is under this forum as Help please! by me.
As TK told you, the A and the f are the same thing: future value.
Also the r and i are the same thing: the interest rate.
Let's use F as Future value; more in line with P = Present value.
And let's use r as the interest rate.
Formula: P = F / (1 + r/n)^nt
Example: if the interest compounds quarterly (4 times per year) and
we're looking at a 5 year period, then n=4 and t=5 :
4 * 5 = 20, the total number of "quarters".
So in formula: P = F / (1 + r/4)^(4 * 5)
But if interest compounds annually (1 time per year), then n = 1;
so in formula: P = F / (1 + r/1)^(1 * 5) = F / (1 + r)^5
I KNOW that's pretty confusing...
The "standard" formula (in Canada anyway) is:
P = F(1 + i)^n, where:
i = the periodic interest rate (8% cpd. quarterly = .08/4 = .02)
n = the number of periods (if above for 5 years, then 5*4 = 20)
So to find present value of $5000 due in 5 years, using above:
P = 5000 / (1.02)^20 = 3364.86 : 3364.8566666....
