Present Value of Future Cash Flow

Alice is considering an investment in a bond that will pay her a lump sum of $10,000 in 5 years. She requires a return of 6% per annum on her investments. To determine how much she should be willing to pay for this bond today, Alice can calculate the present value (PV) using the present value formula:

$$PV =\frac{FV}{(1 + r)^n}$$

Where:

• PV = Present Value
• FV = Future Value, which in this case is $10,000
• r = annual interest rate (0.06 or 6%)
• n = number of years until payment (5)

What is the present value of this future payment?