How to Calculate Present Value Factor

Calculating Present Value Factor

Present factor allows an easy calculation to determine how much money received at a future date is worth now. For example, a person will receive $10,000 in five years and the person wants to know how much the $10,000 is currently worth. Currently, the $10,000 will be worth less than $10,000 due to the time value of money. Time value of money is that money now is worth more than money in the future.

Instructions

1. Add 1 to the interest rate. For example, if there is an interest rate of 5 percent due in six years then, 1 + 0.05, which equals 1.05.

2. Raise the answer in Step 1 to the power of the amount of time. In the example, the amount of time is six years, therefore the equation is 1.05 ^ 6 which equals 1.3401.

3. Divide 1 by the number calculated in Step 2. In the example, 1 / 1.3401 equals 0.7462.

Tips & Warnings

• It is easier to use a present value table than to do the actual mathematical formula.

References

• Investopedia: Time Value of Money
• Investopedia: Present Value Interest Factor
• Accounting Info: Present Value Table