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3.4 Present Value of a Single Sum

Present value is the amount of money that must be invested today, at a given rate of return over a given period of time, in order to get a specified Future Value.

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A dollar today is worth more than a dollar tomorrow. Same thing applies here also. If you are offered the choice between $ 100,000 now and $ 100,000 at the end of the year, you naturally take the money now to get a year's interest.

We have seen that $ 100 invested for 1 year at 6 percent will grow to a future value of 100 × 1.06 = $ 106. Let’s turn this around: How much do we need to invest now in order to produce $106 at the end of the year?

Thus the formula for calculating Present Value is:

present value of a single sum

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