Initial Investment

Now do Exercises 47–62

Calculator Close-Up

You can use a calculator to demonstrate that the power of a power rule for exponents holds when the exponents are negative integers.

3 The Present Value Formula

In Section 4.1, we studied the amount formula A = P(1 + r)n. If we are interested in the principal P that must be invested today to grow to a specified amount A in the future, then the principal is called the present value of the investment. We can find a formula for present value by solving the amount formula for P:

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Present Value Formula

The present value P that will amount to A dollars after n years with interest compounded annually at annual interest rate r is given by the formula

EXAMPLE 6