3-2. Draw à cash flow diagram for $10,500 being loaned out at an interest rate of 15% per annum over a period of 6. years. How much simple in- terest would be repaid as a lump-sum amount at the end of the sixth year?

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.