Present worth is the value found by discounting fu-ture cash flows to the present or base time.

** Discounting: **The inverse of compounding is determin-ing a present amount which will yield a specified future sum. This process is referred to as discounting. The equa-tion for discounting is found readily by using the com-pounding equation to solve for

*P*in terms of

*F*:

*P *=* F *(1+* i *)^{–N}

__EXAMPLE:__

What present sum will yield $1000 in 5 yr at 10 percent?

*P* = 1000(1.1)^{-5}

= 1000(0.62092)

= $620.92

This result means that $620.92 “deposited” today at 10 percent compounded annually will yield $1000 in 5 yr.

__Present worth factor:__** **In the discounting equation, theexpression (1 + *i* )^{–N} is called the *present worth factor* and is represented by the symbol (*P*/*F*, *i*, *N*). Thus, for the present worth of a future sum at *i* percent interest for *N* periods,

*P *=* F *(*P*/*F*,* i*,* N*)

Note that the present worth factor is the reciprocal of the compound amount factor. Also note that

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