Before learning what is the present discounted value formula, let us recall what is a discount. Discount refers to the price lower than the actual price of the commodity. The present discounted value formula is used to find the present discount value against a particular future amount received in a year from the current date.
The present discounted value formula is represented in terms of the future value, rate of return, and the number of periods. It is given as:
Let us see the applications of the present discounted value formula in the following section.
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Example 1: What is the present value of $500 received in 3 years if the rate of interest is 10% per annum discounted annually?
Solution:
To find: The Present Value.
Future value = $500
Using present discounted value formula,
Answer: The present value is $375.66.
Example 2: What is the present value of $500 received in 3 years if the rate of interest is 10% per annum discounted semi-annually?
Solution:
To find: The Present Value
Future Value = 500
Time = 3×2 = 6 months (as the rate is discounted semi-annually)
Using present discounted value formula,
Answer: The present value is $282.24
