What is present value?
Present value is the value in today’s dollars of a sum of money to be received in the future. In simpler terms it is the current value of a future payment. The formula for calculating present value is:
In the formula FV is the future value, n is the number of years and r is the interest or discount rate. For example you may have a savings bond with a discount rate of 6 percent that pays you $1000 in 10 years. If you wanted to know what the bond is worth in today’s dollars plug the appropriate figures into the above equation.
In this case FV = $100, n = 10 and r = 6 percent so our equation would be:
In the formula FV is the future value, n is the number of years and r is the interest or discount rate. For example you may have a savings bond with a discount rate of 6 percent that pays you $1000 in 10 years. If you wanted to know what the bond is worth in today’s dollars plug the appropriate figures into the above equation. In this case FV = $100, n = 10 and r = 6 percent so our equation would be:
= 1000(0.5584)
= 558.40
The value of the $1000 savings bond is $558.40 in today’s dollars. There are many concepts in finance that can be confusing. If you are having difficulty with any aspect of a present value assignment or future value assignment we provide a service that can help.
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