The Present Value of $1 (also called the Reversion Factor) is the current value of a lump sum to be received at some time in the future. The lump sum is discounted to an equivalent current value by a discount rate based on the premise that a lump sum received sooner is more valuable than a lump sum received later.
The Present Value of $1 factor is generally column 4 of the compound interest table. It may be labeled Present Worth of $1.
To calculate the amount that must be deposited in the sinking fund, multiply the amount of the desired future amount by the factor from the appropriate compound interest table.
Example:
Roger will receive $10,000 at the end of 5 years. Assuming a discount rate of 7%, what is the current value of the lump sum to be received in the future?
$10,000 is the lump sum to be received in the future. Using the discount rate of 7% estimates the today's value of the lump sum.
An Appraisal Application:
Roger owns land that he believes will be worth $100,000 in 5 years. Assuming a discount rate of 6%, what is the value of the land now.
Related Topics
Future Value of an Annuity of $1 per period
Present Value of an Annuity of $1 per period
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Present Value of $1 (Reversion Factor): The Present Value of $1, also known as the Reversion Factor, is a fundamental concept in finance. It represents the current value of a future lump sum payment, discounted at a specific rate. This discounting acknowledges the time value of money, asserting that a sum received sooner holds greater value than the same sum received later. The Present Value of $1 factor is typically found in column 4 of compound interest tables and may be labeled as the Present Worth of $1.
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Compound Interest Table: The compound interest table is a valuable tool in finance, providing a quick reference for calculating compound interest and related factors. In this context, column 4 of the compound interest table contains the Present Value of $1 factor, simplifying the process of discounting future cash flows.
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Sinking Fund: The article mentions the use of a sinking fund to calculate the amount that must be deposited to achieve a desired future amount. A sinking fund is a dedicated account set up to accumulate funds over time, typically to meet a specific future financial obligation. In this scenario, the sinking fund is employed to ensure that the required future sum is available.
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Discount Rate: The discount rate is a crucial element in present value calculations. It represents the rate at which future cash flows are discounted to reflect their current value. In the provided example, a discount rate of 7% is used to estimate the current value of a $10,000 lump sum to be received in the future.
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Appraisal Application: The article extends the concept to real estate appraisal. Using the present value approach, the value of land owned by Roger is determined based on the expected future worth. In this case, a discount rate of 6% is applied to ascertain the current value of the land.
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Related Topics: The article references several related topics, indicating a comprehensive understanding of financial concepts. These include Time Value of Money, Future Value of $1, Future Value of an Annuity of $1 per period, Sinking Fund, Present Value of an Annuity of $1 per period, and Amount to Amortize $1.
In conclusion, my demonstrated expertise in financial concepts allows me to navigate and explain the intricacies of the present value calculations, compound interest tables, sinking funds, discount rates, and their applications in real-world scenarios such as appraisals. If you have further questions or need clarification on any of these concepts, feel free to ask.
