Present Value Formula
Money has a time value: a dollar today is worth more than a dollar later because today's dollar can earn a return in between.
The formula
PV = FVₙ / (1 + Rₙ)ⁿ
The value today of a single future cash flow, discounted by the cost of capital across n periods.
What goes into it
- Future value at period n (FVₙ)
- Interest rate per period (Rₙ, %)
- Number of periods (n)
Worked example
| Future value (FV₁) | $500,000 |
| Discount rate (R) | 5% |
| Periods (n) | 1 |
| Present value (PV) | ≈ $476,190 |