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How To Calculate The Present Value Of Money Explained - Time Value Of Money

In this video we discuss how to calculate the present value of money given a future value. We go through a few examples using the formula for future value Transcript/notes The formula for calculating the present value of money is, the present value equals, the future value divided by, the quantity 1 plus r, divided by n, raised to the n times t. In this formula, future value represents the value of an amount in the future, r represents the yearly interest rate, n represents the number of compounding periods per year and t represents the time in years. As an example, let’s say that someone wants to buy a used motorcycle in 2 years, that will cost $1800. Their bank has an account that pays 9% interest compounded quarterly, so 4 times per year. How much do they need to put in the account today to have $1800 in 2 years? Using the formula, we have present value equals, $1800, divided by the quantity, 1 plus .09, the decimal value of the yearly rate of 9%, divided by 4, the number of compounding periods per year, raised to 4, the number of compounding periods per year, times 2, the number of years. Here are all of the calculations written out on the screen. And in the end we get $1506.49 rounded off. So, this basically means that in today’s dollars, $1800 is worth $1506.49. And here are a couple more examples on the screen of how to calculate the present value, given a future value. Chapters/Timestamps 0:00 Formula to calculate the present value of money 0:23 Example of how to calculate the present value of money 0:43 Formula set up for example 1:23 More examples of how to calculate the present value of money