How do you calculate the present value factor?
submitted by deidre Thurman

udg

You probably mean Present Value Interest Factor. The formula is:

1 / (1 + r)^t

r = discount interest rate
t = number of periods

kendall

If someone promises to pay you $1,000 a year from now, and your desired rate of return is, say, 5%, then that $1,000 isn’t worth $1,000 today. Instead, it’s worth less because of the opportunity cost, which is what you could have earned if you had the money today now and invested it.

So, using the formula...

r = the discount rate or the rate of return you want (5%)
t = the number of periods until you receive the money (let's say 3 years)

Plugging those in gives you the factor you multiply your future value by to find out what it’s worth today. It’s pretty handy in valuation, capital budgeting, and pretty much any time you're trying to compare cash flows over different periods.