I have spent way too much time trying to wrap my head around this one. So, I decided to reach out to the mighty warriors here on AF.
Q: Your pension plan will pay you a lump sum distribution of $285,000 in 18 months. Assuming continuous compounding at an annual rate of 7%, calculate the present value of the distribution.
First off, I already know how to calculate the present value. I just don’t understand the calculation conceptually. I understand continuous compounding. However, I am confused on the concepts behind this problem specifically. Can somebody help me out on this one please??
All they’re asking is how much you would have to invest today at 7% compounded continuously to have $285,000 in 1½ years.
Makes perfect sense. So how would you go about computing this one on the BA II plus?
$285,000 ÷ (e^(1.5 × 7%)).
You should get $256,592.
Thank you, sir.
I totally get it now. Didn’t realize there was a straight forward formula for PV w/ Continuous Compounding.
PV w/continuous compounding = C ÷ e^rt
C = Cash Flow
r = rate
t = time
http://www.financeformulas.net/Present-Value-Continuous-Compounding.html
One more thing,
Somehow I get the same answer entering the following on the BAII plus:
(-.07*1.5) = -.105
2nd LN (i.e. e^x) = .9003
.9003*285,000 = $256,592
I noticed that e^(-.105) = 1 ÷(e^(+.105))
What am I missing here? I know this probably goes back to my highschool days but I don’t get it.
You’re not missing anything: e^(-x) = 1/(e^x). That’s one of the rules for exponents.
LOL you are a great encourager. I would say the “rules for exponents” does qualify as going back to my highschool days. Either way, thanks so much for your help tonight. I truly appreciate it. Now I can move on w/o that buggin me for the next 3 days.