The present value (PV) of an amount of money can be calculated using the formula:
PV = FV / (1 + r)^n
Where:
- PV = Present Value
- FV = Future Value (the amount of money in the future)
- r = Interest rate (as a decimal)
- n = Number of periods (years, months, etc.)
This formula helps determine how much a future sum of money is worth in today’s terms, considering a specific interest rate over a certain period of time. Essentially, it reflects the concept of time value of money, which states that money available now is worth more than the same amount in the future due to its potential earning capacity.