Present Value

An asset's present value is the equivalent value of an asset in today's dollars, given its value at a specific time in the future. The equation for computing present value is:

PV = FV / (1 + R) ^n

Where,

PV = present value

FV = future value

R = assumed interest rate

n = number of years into future

For example, assume you expect to receive an inheritance of $100,000 in 10 years and you want to know what the equivalent bequest would be in today's dollars in terms of buying power. Based on an assumed annual inflation rate of 4% per year, the present value of the $100,000 bequest is:

PV = 100,000 / (1 + .04)^10 = $67,556