It is now January 1, 2015; and you will need $1,000 on January 1, 2019, in 4 years. Your bank compounds interest at an 8% annual rate. How much must you deposit today to have a balance of $1,000 on January 1, 2019? The formula method for this questions is

Pv = $1000 (1.08)^-4

Explanation:

Compounding is the computation of the future value of $1 invested today while discounting is the determination of the present worth of $1 in the future. Both are related by the equation

Fv = Pv ( 1 + r )^n

where Fv = Future amount

Pv = Present value

r = rate of return

n = time in years

Hence the formula required

$1000 = Pv (1 + 0.08)^4

Pv = $1000 (1.08)^-4

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