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Using a Time Line to Solve Time Value of Money Problems

Posted on January 25, 2021January 25, 2021 by financialeducation

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 valueDiscount factorYear 1Year 2Year 3
970.871.0311,000
1,036.861.0321,100
1,098.171.0331,200
3,105.90

The total present value is 3,105.90.

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