00:01
So what is present value, right? it is the converting of future payments to today's dollars, right? i would rather have $100 today than a year from now, right? those $100 a year from now are not worth as much to me as $100 today.
00:26
In particular, i could invest $100 today, earn interest, and have more than $100 a year from there.
00:32
So we need to adjust future payments to account for the interest that could be earned while we wait for those payments.
00:39
So we have three years.
00:42
We get 250 and we want to calculate the present value plus 450 plus 450.
00:51
Now we can't add those things because those are dollars received at different points in time.
00:57
And dollars received at different points in time are not the same thing and cannot be added together.
01:01
The whole idea is that a year from now, these dollars are worth 5 % less because we could earn 5 % interest if we got it today.
01:11
So they're worth 5 % less.
01:14
Two years from now, those dollars will be worth 5 % less twice.
01:20
And three years from now, those dollars will be worth 5 % three times, right? this is how you calculate present value.
01:28
For every year you go into the future, you reduce the value.
01:32
Value of those dollars by the interest rate, right? because the interest rate is telling you something about how the market views the values of dollars today versus dollars tomorrow.
01:42
So if you go ahead and plug that into your calculator, you get 948 .60...