Economics Time Value Of Money Questions Long
The formula for calculating the present value of a single cash flow is as follows:
PV = CF / (1 + r)^n
Where:
PV = Present Value
CF = Cash Flow
r = Discount Rate
n = Number of periods
In this formula, the cash flow (CF) represents the future amount of money to be received or paid, while the discount rate (r) represents the rate of return or interest rate that is used to discount the future cash flow. The number of periods (n) refers to the length of time until the cash flow is received or paid.
By dividing the cash flow (CF) by the factor (1 + r)^n, we are essentially discounting the future cash flow to its present value. This is because money received in the future is worth less than the same amount of money received today, due to the opportunity cost of not having that money available for investment or consumption immediately.
The present value (PV) represents the current worth of the future cash flow, taking into account the time value of money. It allows us to compare and evaluate the value of cash flows occurring at different points in time, by bringing them back to their equivalent value in today's terms.