When solving time value of money problems, it can sometimes be helpful to establish a time line. For example, consider an investment that will pay 1,000 in 1 year, 1,100 in 2 years, and 1,200 in 3 years. With an interest rate of 3% annually we can visualize this as follows.
Present value | Discount factor | Year 1 | Year 2 | Year 3 |
970.87 | 1.031 | 1,000 | ||
1,036.86 | 1.032 | 1,100 | ||
1,098.17 | 1.033 | 1,200 | ||
3,105.90 |
The total present value is 3,105.90.