Present Value

Present value calculations are widely used on annuities. In this section, we will define what present value is and how to calculate present value and net present value. By using the present value formula, you can easily calculate the present value or net present value. We will apply the present value calculation to annuity.

What is present value?

When we calculate the amount to which a sum of money will grow in the future, we use the following formula.

By rearranging the above formula, we have the present value formula below:

Where:

• P = Present value of a sum of money A_n
• A_n = sum of money due n time periods
• r = rate of interest per time period
• n = number of time periods

From the present value formula above, P is the present value of a single sum of money A_n due n time periods. The money can be invested at the rate of interest r.