Final answer:
The formula to calculate the present value of future cash flows is PV = FV / (1 + i)^n, where PV is the present value, FV is the future value, i is the interest rate, and n is the number of periods.
Step-by-step explanation:
The equation used to calculate the present value (PV) of future cash flows is PV = FV / (1 + i)^n. In this formula, FV represents the future value of the cash flows, i is the interest rate per period, and n is the number of periods. To calculate the present value of a series of equal payments R, with an interest rate i per period for n periods, you would use the formula PV = R × ×1-(1+i)^-n ÷ i. It is important to note that to calculate the growth rate, a different formula is used which is: Future Value = Present Value x (1 + g)^n, where g represents the growth rate.
The process of calculating present value is all about determining what an amount of money to be received in the future is worth in today's terms, taking into consideration a specific interest rate. For example, if you want to find the present value of $1000 to be received in 5 years with a 15% interest rate, you would apply the present value formula accordingly. Summing up all present values for different periods gives a final answer for multiple future cash flows.