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Math Help - Present value

  1. #1
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    Present value

    Hi everybody, I hope I choose the right sub-forum! I'm reading Ricardo's Principles in their second edition, but I'm not good at maths. I would like to ask a thing about "present value".

    Quote Originally Posted by Mr. David Ricardo
    to replace the equal portion of fixed capital, when profits are at the rate of 10 per cent. there should be annually received 16.27l.; for, the present value of an annuity of 16.27l. for ten years, when money is at 10 per cent. is 100l.
    What's the formula used to get 100 from 10 annuities of 16.27? And where should I put the "10 per cent" in the formula? In a few words, how would you explain the underlined sentence? Sorry for my poor English and thank you in advance!
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  2. #2
    MHF Contributor
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    P = present value (?)
    A = annuity amount (16.27)
    n = number of years (10)
    i = interest rate (.10)

    Formula: P = A[1 - 1/(1 + i)^n] / i

    P = 16.27(1 - 1/1.10^10) / .10 = 99.972... (close nuff!?)

    16.28 will give you 100.0335...
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  3. #3
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    Thank you Wilmer, that's the formula I was looking for! Great!
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