The present value (PV) of an amount of money is calculated using the following expression:
PV = FV / (1 + r)^n
Where:
- PV: Present Value – the current worth of a given amount of money in the future.
- FV: Future Value – the amount of money you expect to receive in the future.
- r: Interest rate (as a decimal) – the rate at which the money grows per period.
- n: Number of periods – the number of times the interest is applied over time.
For example, if you want to find out how much a $1,000 sum of money in 5 years would be worth today, with an interest rate of 5%, you would plug those values into the formula:
PV = 1000 / (1 + 0.05)^5
Calculating this gives:
PV = 1000 / (1.27628) ≈ 783.53
This means that you would need approximately $783.53 today to have $1,000 in 5 years at a 5% interest rate.