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Present value and discounting

Money today is worth more than the same amount in the future, because it can earn interest in the meantime. The present value of a future amount is found by discounting it with a discount rate. Conversely, the future value gives what an amount today grows to after nn years of compound interest.

P=F(1+r)nP = \frac{F}{(1+r)^n}present value of the amount FF in nn years
F=P(1+r)nF = P(1+r)^nfuture value of the amount PP today

Symbols

PPpresent value (today)kr
FFfuture valuekr
rrdiscount rate per year
nnnumber of years

Example

10,000 kr in 14 years, discount rate 8%:

P=10000/1.0814≈3405P = 10000/1.08^{14} \approx 3405 kr.

The further in time and the higher the rate, the smaller the present value of a future amount.
Practise interest and time value for free →

Compound interest →

Part of Engineering Economics: Interest and time value.