ABSTRACT
The value of a sum of money £P at some timeT years in the future at an interest rate of i is given by:
PT = P(1 + i)T
So the Present Value of £PT in T years time is:
P = PT (1 + i)−T
If we look at our steady income of £6m pa over four years and assume a rate of 5.5%, by today’s standard it’s not worth the £24m we originally assumed; it’s only worth £21.03m as the table below shows:
Year PV £m
1 5.69 2 5.39 3 5.11 4 4.84 TOTAL 21.03
This calculation of the Present Value of money that we will have in the future is called ‘discounting’.
