Question

How is the present value of a lump sum determined?

Short answer

Answer

$PV=FV\frac{1}{{\left(1+r\right)}^{°}}$

Step-by-step solution

Meaning of Present Value

Present value compares the acquiring control of a future dollar to that of a current dollar. It is a money-related calculation that gauges the worth of a future amount of cash or stream of installments in today's dollars adjusted for interest and inflation.

Determination of the present value of a lump sum.

The following formula is used to calculate the present value (PV) of a lump sum: PV factor for future value for interest rate and time.

In which the future value FV is divided by a factor of 1 + I for each interval between present and future dates.

To calculate the PV, enter these figures into the present value calculator:

FV stands for the sum of future values.

“n” in the formula is the number of time periods (years).