Problem: You will receive $4,000 three years from now. The discount rate is 10 percent.
One year at 10% n =0.909
Two year at 10% n = 0.826
Three year at 10% = 0.751
1) What is the value of your investment two years from now? Multiply $4,000 X .909 (one years discount rate is 10 percent).
2) What is the value of your investment one year from now? Multiply your answer to part (a) by .909 (one years discount rate at 10 percent).
3) What is the value of your investment today? Multiply your answer to part (b) by .909 (one years discount rate at 10 percent).
4) Confirm that your answer to part (c) is correct by going to Appendix B (present value of $1) for n = 3 and i = 10%. Multiply this tabular value by $4,000 and compare your answer in part (c). There may be a slight difference due to rounding. (three year at 10% is 0.751).