Excel Formula To Calculate Time Difference In Hours And Minutes What Is Present Value and How Do You Use the Present Value Formula?

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What Is Present Value and How Do You Use the Present Value Formula?

If you already understand the concept of future value, you can learn another concept of present value. What is the “present value” of $100 today? It’s also $100! Why? Because “present” means “today”.

Now, let’s say you have $100 in the bank today. However, this amount in the bank has been charging interest for 1 year. Let’s say (for example) that 1 year ago, this money was worth a little over $95 (let’s use $95 to simplify), and then it earned interest throughout the year, and so it’s now worth $100. What is the “past value” of your $100? Again, simple! It is $95.

However, this was a very simple example to demonstrate the concept. The main challenge in business school or in real business is figuring out the right numbers using scary-looking but very simple formulas.

The present value (aka PV) or past value formula, simplified, looks like this:

PV = (1 + interest rate)^n

where n = number of years.

don’t be afraid Depending on your learning style, the best way to learn how to use formulas and calculate may not be through books or the written word. You may prefer to watch it in action on a video from any of the multitude of websites that offer free online tutorials or on YouTube. Moreover, many modern scientific calculators as well as iPhone and Android apps allow users to calculate the same results instantly, without any problems.

The most confusing thing about the current and past price concepts is that in many business schools and with many books, the two are interpreted as if they are the same thing. However, they are not the same. They are very different! Why the confusion? Because they use a common formula. However, the result of the formula will tell you one of them, depending on how the story is told.

For example:

1) In an example, let’s say you have $100 today. How much was the previous year before earning 5% interest? Use the usual formula and you’ll come up with a past price of a little over $95.

2) In another separate example, let’s say that next year you will have $105 after earning 5% interest for 1 year. How much is it worth today? Using the same formula above, you will come up with a present value of $100.

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