Present Value
PV = FV / (1 + r)^n
Discount a future cash flow back to today. Present value tells you what a future dollar is worth right now.
Variables
Value today
Value in n periods
Discount rate per period
Number of compounding periods
Example Calculation
Scenario
You need today's value of $1,000 received in 3 years at 8%.
Given Data
Calculation
PV = 1000 / (1.08)^3 = 1000 / 1.2597 = 793.83
Result
$793.83
Interpretation
Receiving $1,000 in 3 years is worth $793.83 today at an 8% discount rate.
When to Use This Formula
- ✓Single future cash flow discounting
- ✓TVM exam problems
- ✓Comparing cash flows at different times
Common Mistakes
- ✗Using percent instead of decimal for r
- ✗Wrong period count when compounding is not annual
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FAQs
Common questions about this formula
A higher discount rate decreases PV because future dollars are worth less today.
PV decreases as n increases because the cash flow is further in the future and must be discounted over more periods. This is why a dollar today is always worth more than a dollar tomorrow.