Which of the following is the correct formula for computation of Present Value?

To determine the correct formula for the computation of Present Value (PV), it's essential to understand the concept behind it. The Present Value formula helps in calculating the current worth of a future sum of money or stream of cash flows given a specified rate of return.

Common Present Value Formula

The formula to calculate Present Value is:

$PV = \frac{FV}{(1 + r)^n}$

Where:

• $PV$ = Present Value
• $FV$ = Future Value
• $r$ = interest rate (as a decimal)
• $n$ = number of periods until payment or cash flow occurs

Explanation

1. Future Value (FV): This is the amount of money you expect to receive in the future.
2. Interest Rate (r): This is the discount rate which reflects the rate of return you could earn if you invested the money today instead.
3. Number of Periods (n): This represents the total time until the amount is received.

Conclusion

Therefore, this formula allows you to find out how much a future sum of money is worth today by accounting for the time value of money.