What is Present Value Factor

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PV factor = 1 ÷ (1 + r)n

r = rate of return
n = number of periods

Present value factor formula is utilized commonly by investors and financial analysts to figure out the present value of money you have to receive in future.

Time value of cash is the basic idea behind the concept of present value factor. Time value of cash is the possibility that a sum of money got today will worth more compared to a similar sum available at a future date. Any sum of money available today can be easily moved to earn some extra money up to a specific time in future.

Utilization of the Present Value Factor Formula

By determining the present value today of an amount available at a future date, the equation for PV factor is then utilized to figure-up a sum bigger than available amount. To calculate this, a simple technique is used where the PV factor is multiplied with the amount available at the future date.

For instance, if Tim receives $700 in next 2 years with a rate of 12% then to calculate the present value of that amount at present date we will use the present value factor to multiply it with amount and rate also. The present value factor is normally available on a table that rundowns the factors influenced by rate (r) & term (t) basis.

When you get the factor from the table then, you can simply multiply it by the given amount and get the present value of future figure. Utilizing the equation on the above example, the present value factor of 2 years and 12% is 0.797, so $700 multiplies with 0.797 equivalents to $557.9 in today money value.

How present value factor formula is extrapolated

Actual present value formula is further break down to get the equation for present value factor.

PV = FV [1 ÷ (1 + r)n]

FV = future value
r = rate of return
n = number of periods

If you take out the FUTURE VALUE portion the remaining part of equation is the present value factor formula to calculate the PV.

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