## Formula for the present value (discounted value) of a future amountP = the present value of amount A, due n years from now r = the rate of interest For example, someone contracts to pay you $100,000 in ten years. What's that worth right now, if they changed their mind and decided to paid you upfront? Say the interest rate is 5%.
P = A/(1 + nr) If A = 100,000 and n = 10 and r = 0.05 (which is to say, 5%), then P = 100,000/(1 + 10x0.05) = 100,000/1.5 = 66,667
P = A/(1 + r) Using the same example as for simple interest, this gives P = 100,000/(1 + .05)
P = A/(1 + r/q) Or in the same example but compounding monthly (q = 12) P = 100,000/(1 + 0.05/12) |