Present Value: The value today of future sum of money or cash flow. Present Value can be calculated using the following formula:
PV = FV/(1+r)n
FV : Future Value
r : interest rate
n : number of time periods (years, months, weeks, etc)
The present value is always less or equal to the future value. The present value is the future value discounted.
Question: what is the present value of an investment profit of $900,000 which will be received two years from now knowing that the yearly interest rate is 12 percent.
PV = FV/(1+r)n
PV = $900,000/(1+ 0.12)2, or $717,475.
Note that interest rate is mostly yearly. However, you need to convert it to monthly if time periods are given in months.
Example: for the question above, what is the present value if the profit would be received 24 months from now?
Yearly interest rate is 12%
Monthly interest rate is yearly interest rate / 12, or 1%
n is 20 months
PV = $900,000 / (1 + 0.01)24, or $708,810
PV = FV/(1+r)n
FV : Future Value
r : interest rate
n : number of time periods (years, months, weeks, etc)
The present value is always less or equal to the future value. The present value is the future value discounted.
Question: what is the present value of an investment profit of $900,000 which will be received two years from now knowing that the yearly interest rate is 12 percent.
PV = FV/(1+r)n
PV = $900,000/(1+ 0.12)2, or $717,475.
Note that interest rate is mostly yearly. However, you need to convert it to monthly if time periods are given in months.
Example: for the question above, what is the present value if the profit would be received 24 months from now?
Yearly interest rate is 12%
Monthly interest rate is yearly interest rate / 12, or 1%
n is 20 months
PV = $900,000 / (1 + 0.01)24, or $708,810