But the present value, what does that mean?

What's the present value of 50 in 1 year?

Hopefully people will be watching this in the next millenia.

That is 100.

We'll now learn about what is arguably the most useful concept in finance and that is called the present value.

But that's just 1.02 divided by 1, which is just 100. 100 today.

42 million in adjusted dollars. That's minus payload, of course.

let me just scroll down so let's say that one year so today, one year so we figured out that 110 a year from now, its present value is equal to so the present value of 110 is equal to 104,76.

Well, we said let me do that in a different color.

Present value of 100 today is 100.

Present value

Present values

So that's where it comes from.

So how do you compare the two?

Current Value

Current value

So that is the value in 2 years.

Get out my virtual Tl 85.

This dollar would be 1.11 to the third.

And the notation is PV

Choice number three, the 20 today, the 20 now, well that's just worth 20.

And then to get its present value, its value today, you divide that by 1.05 again.

Something interesting is emerging.

So it equals 104,76.

Why is that?

And I'll introduce my notation.

When you lower the interest rate, the present value of this future payment goes up.

Anyway.

Actually I meant to present value it.

110 divided by 1.05 squared is equal to 99.77.

So the present value of 20 today, well that's just 20.

Just like we did here.

So already you've made the decision.

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And in the first case we assumed a 5 treasury rate.

Oh no, I didn't.

Well the present value of that is going to be so plus 50 divided by 1.05, right that's the present value of the 50, because it's 1 year out.

Forward is multiplication, backwards is division.

1.02 squared is a smaller number than 1.05 squared.

This is the difference between the two.

So I'm as risk free as the federal government.