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PART THREE Valuation of Future Cash Flows the present value of $1,000 in three years at 15 percent. We do this by discounting $1,000 back three periods at 15 percent. With these numbers, the discount factor is:

The amount you must invest is thus:

We say that $657.50 is the present or discounted value of $1,000 to be received in three years at 15 percent.

There are tables for present value factors just as there are tables for future value factors, and you use them in the same way (if you use them at all). Table 5.3 contains a small set. A much larger set can be found in Table A.2 in the book's appendix.

In Table 5.3, the discount factor we just calculated (.6575) can be found by looking down the column labeled "15%" until you come to the third row.

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