Final answer:
The present value is the value today of a sum of money to be received in the future and is generally less than the future value. It is used to estimate the worth of future cash flows in today's terms by factoring in the time value of money. To calculate the present value, you need to know the future value, the interest rate, and the time period.
Step-by-step explanation:
The present value is the value today of a sum of money to be received in the future and is generally less than the future value. It is used to estimate the worth of future cash flows in today's terms by factoring in the time value of money.
To calculate the present value, you need to know the future value, the interest rate, and the time period. The formula for present value is:
Present Value = Future Value / (1 + Interest Rate) ^ Time Period
For example, if you have $1,000 that will be received in 2 years with an interest rate of 5%, the present value can be calculated as:
Present Value = $1,000 / (1 + 0.05) ^ 2 = $907.03.