How to Calculate Present Value and Future Value of Different Cash Flows

Present value is the current worth of a future sum of money. The longer you have to wait to receive the money, the lower its present value will be. The discount rate is the rate of return you could earn on an alternative investment, so the higher the discount rate, the lower the present value will also be.

Future value is the amount of money an investment will be worth in the future. The longer you invest your money, the higher its future value will be. The higher the interest rate, the higher the future value will also be.

The present value and future value of a single sum of money can be calculated using the following formulas:

Future value = Present value (1 + Interest rate)^Number of years
Present value = Future value / (1 + Interest rate)^Number of yearsFor example, if you invest $100 today at an interest rate of 5% for 5 years, the future value of your investment will be $127.63.

An ordinary annuity is a series of equal cash flows that occur at the end of each period. The present value of an ordinary annuity can be calculated using the following formula:

Present value = Periodic payment (1 - (1 + Interest rate)^-Number of years) / Interest ratewhere:

• Periodic payment is the amount of each payment
• Interest rate is the rate of return you could earn on an alternative investment
• Number of years is the number of years the annuity will last

For example, if you want to receive $100 at the end of each year for 5 years, the amount you need to invest today at an interest rate of 5% is $614.46.

An annuity due is a series of equal cash flows that occur at the beginning of each period. The present value of an annuity due can be calculated using the following formula:

Present value = Periodic payment (1 - (1 + Interest rate)^-Number of years) / Interest rate(1 + Interest rate)

For example, if you want to receive $100 at the beginning of each year for 5 years, the amount you need to invest today at an interest rate of 5% is $658.32.

A perpetuity is a series of equal cash flows that occur forever. The present value of a perpetuity can be calculated using the following formula:

Present value = Periodic payment / Interest rateFor example, if you want to receive $100 at the end of each year forever, the amount you need to invest today at an interest rate of 5% is $20.

I hope this helps!