Final answer:
The present value factor, denoted (P/F,i,N), is used to calculate the current value of a future amount given an interest rate and the number of periods. This concept is important when evaluating investments like bonds and stocks to understand interest rate risk and opportunity cost.
Step-by-step explanation:
The present value factor, denoted (P/F,i,N), gives the present amount, P, that is equivalent to a future amount, F, when the interest rate is i and the number of periods is N. This factor answers what the amount in the future is worth in the present, given a certain interest rate. Using the formula PV = FV / (1+i)^N, where PV is the present value, FV is the future value, i is the interest rate per period, and N is the number of periods, we can calculate the present value of a future payment. This concept is crucial in the assessment of investments, such as bonds or stocks, where the interest rate risk and the opportunity cost must be taken into account.
To calculate the present value of a series of future payments, you would need to use the present value factor and sum up all the present values for the different time periods. For instance, a payment of $125 a year from now, with an interest rate of 25%, would have a present discounted value of $100.