- Introduction - Time Value of Money
- Interest Rates
- Interest Rate Equation
- Nominal Interest Rate and Effective Yield
- Time Value of Money for Different Compounding Frequencies
- Future Value of a Single Cash Flow
- Present Value of a Single Cash Flow
- Future Value and Present Value of Ordinary Annuity
- Present Value and Future Value of Annuity Due
- Present Value of a Perpetuity
- Present Value and Future Value of Uneven Cash Flows
- Annuities with Different Compounding Frequencies
- Using a Timeline to Solve Time Value of Money Problems
Present Value of a Single Cash Flow
Present value of a single cash flow refers to how much a single cash flow in the future will be worth today. The present value is calculated by discounting the future cash flow for the given time period at a specified discount rate.
The formula for calculating future value is:
Calculate the present value (FV) of a payment of $500 to be received after 3 years assuming a discount rate of 6% compounded semi-annually.
FV = 500/((1+6%/2)^(2*3)) = $418.74
We can also solve this problem using the calculator as follows:
In our above example, enter FV = 500, change P/Y = 2 (semi-annual compounding), I/Y = 6, N = 6.
Then press CPT > PV. We get:
FV = 418.74