Present Value of a Lump Sum to be received in the FutureIf you are going to receive $1102.50 in two years time, what is the value of the amount you are going to receive worth today? We should think of Present Value as follows:
Future Value = Present Value today + Compound Interests earned in two years = $1102.50
Present Value = Future Value – Compound Interests earned in two years
Basically, we need to discount the compound interests we have earned over the two years to derive the Present Value. Thus, the Present Value is defined as the value today of a given sum of money to be provided at a specific future date discounting the compound interests.
Formula of Present Value of a Lump Sum to be received in the Future
PV = FVn*(1+r)^(-n)
- FVn is the Future Value after a specific period
- PV is Present Value
- r is the interest rate
- n is the period. For example 5 years.
Present Value of a Lump Sum with more than 1 compounding period per year
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