How Do You Calculate Discounted Present Value?
Discounted present value is a way to determine how much a future sum of money is worth now. For example, it takes less than $150 today to produce a value of $150 in two years. How much less depends on the interest rates available or the return expected on an investment. Present value tables are available that show the discount factor given a set period and a set interest rate. For example, money compounds for six months at 4 percent interest each month. The set period, or term, is six months, and 4 percent is the interest rate. Find the value of the money in the future, the interest rate and the term. For example, Matt wants $500 two years from now. He found a bank that will give him 8 percent interest per year. Here, the future amount is $500, the term is two years and the interest rate is 8 percent. Use the Present Value of $1 Table to find the discount factor. In our example, two periods at 8 percent equals 0.85734. Multiply the future amount by the discount factor to determine the
