What is the future value of $1,000 in three years if the rate of discount is equal to 5 percent?

This means that the equivalent sum of money that we should expect in 3 years, given our cost of capital is $1331. This means that we should accept proposals where future value is more than $1331, reject proposals where future value is less than $1331 and be indifferent towards proposals where future value is equal to $1331.

From henceforth, we will refer to this by stating that the future value of $1000, at our given cost of capital, for a period of 3 years is $1331. Also, it must be noted that future values are nominal in nature.

What is present value ?

Present values are the exact opposite of future values. During future values we were compounding a present value at a given rate to reach a future value. But in present value calculations, we will discount the future values, which are nominal in nature, at the given cost of capital for the given period to reach the present value. Let’s look at it with the help of an example.

Now, we have a proposal that offers to pay us $1000, 3 years from hence. Our given cost of capital is 10%.

The formula for calculating the present values is as follows:

Present Value = Future Value / (1 + (cost of capital / 100)number of years

i.e. Present Value = $1000 / (1.10)3

i.e. Present Value = $ 751.31

Conclusion :

This means that the equivalent sum of money that we should expect today, given our cost of capital is $751.31. This means that we should accept proposals where present value is more than $751.31, reject proposals where present value is less than $751.31 and be indifferent towards proposals where future value is equal to $751.31.

Learn more about future values :

brainly.com/question/12122024

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