# THE EFFECT OF INTEREST RATES ON PRESENT VALUE CALCULATIONS

The present value of amounts of money in the future, as the above calculations show, depends on the available interest rate. If interest rates are very low, then the present value looks essentially like the simple sum of all the payments. As interest rates get higher, payments far in the future become pretty worthless.

Table 7.3 shows the total present value of a 24 monthly payment account with \$100 being deposited each month for different interest rates. As you can see from the table, the present value falls as the rate of interest increases.

One factor that’s very easy to model on a spreadsheet but very difficult to predict in advance is just what interest rates will be a few years from now. As long as you can borrow money at a lower rate than you’re paying on a loan, you stand to profit from the difference in rates.

To illustrate this, let’s return to the simple example of the five-payment car loan shown in Table 7.1. You bought a car that’s worth \$4,546 in trade for five annual payments of \$1,000. This is a perfectly equitable deal so long as prevailing interest rates remain at 5%.