Calculation
The most commonly applied model of the time value of money is compound interest. To someone who can lend or borrow for years at an interest rate per year (where interest of "5 percent" is expressed fully as 0.05), the present value of the receiving monetary units years in the future is:
This is also found from the formula for the future value with negative time.
The purchasing power in today's money of an amount of money, years into the future, can be computed with the same formula, where in this case is an assumed future inflation rate.
The expression enters almost all calculations of present value. Where the interest rate is expected to be different over the term of the investment, different values for may be included; an investment over a two-year period would then have PV of:
Spreadsheets commonly offer functions to compute present value. In Microsoft Excel, there are present value functions for single payments (=NPV) and series of equal, periodic payments (=PV). Programs will calculate present value flexibly for any cash flow and interest rate, or for a schedule of different interest rates at different times.
Read more about this topic: Present Value
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