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How to calculate the present value of the time value of money？

帮考网校2020-11-30 14:53:54

To calculate the present value of the time value of money, follow these steps:

1. Determine the future value (FV) of the investment or cash flow. This is the amount of money you expect to receive in the future.

2. Determine the interest rate (r) or discount rate that will be used to discount the future cash flow back to its present value. This is the rate of return you could earn on an alternative investment of similar risk.

3. Determine the number of periods (n) over which the cash flow will be received or invested.

4. Use the following formula to calculate the present value (PV) of the cash flow:

PV = FV / (1 + r)^n

For example, if you expect to receive $10,000 in five years and the discount rate is 5%, the present value of the cash flow would be:

PV = $10,000 / (1 + 0.05)^5 = $7,835.05

This means that if you invested $7,835.05 today at a 5% annual interest rate, it would grow to $10,000 in five years.