SkiptoprimarynavigationSkiptomaincontentSkiptoprimarysidebarSkiptofooterHome»FinancialModelingGuides»ExcelModeling»PresentValueFactor(PV)ArticlebyMadhuriThakurReviewedbyDheerajVaidya,CFA,FRMWhatisPresentValueFactor(PV)Presentvaluefactorisfactorwhichisusedtoindicatethepresentvalueofcashtobereceivedinfutureandisbasedontimevalueofmoney.ThisPVfactorisanumberwhichisalwayslessthanoneandiscalculatedbyonedividedbyoneplustherateofinteresttothepower,i.e.numberofperiodsoverwhichpaymentsaretobemade.PresentValueFactorFormulaYouarefreetousethisimageonyourwebsite,templatesetc,PleaseprovideuswithanattributionlinkHowtoProvideAttribution?ArticleLinktobeHyperlinkedForeg:Source:PresentValueFactor(PV)(wallstreetmojo.com)r=rateofreturnn=numberofperiodsThisformulaiscenteredontheideaofassessingifanongoinginvestmentcanbeencashedandutilizedbettertoenhancethefinaloutcomeascomparedtoanoriginaloutcomethatcanbehadwiththecurrentinvestment.Withaviewtoestimatingwhatwouldbethecurrentvalueofacertainsumtobereceivedonafuturedate,weneedtwofactors,namely,thetimeintervalafterwhichthesumistobereceivedandtherateofreturnforthesame.Thesetwofactorscanthenbeusedtocalculatethepresentvaluefactorsforanygivensumtobereceivedonanygivenfuturedate.ThisPVfactorwouldhelpcalculatethecurrentequivalentamountforthefuture sumintermsoftimevalueformoney, andthenitisusedtocalculatehowbetterreturnscanbeachievedbyreinvestingthiscurrentequivalentinarelativelybetteravenue.ExamplesSuppose,ifsomeoneweretoreceive$1000after2years,calculatedwitharateofreturnof5%.Now,thetermornumberofperiodsandtherateofreturncanbeusedtocalculatethe PVfactorforthissumofmoneywiththehelpoftheformuladescribedabove.PVfactor=1/(1+r)n=1/(1+0.05)2 =0.907Now,multiplyingthesumof$1000tobereceivedinthefuturebythisPVfactor,weget:$1000x0.907=$907Thismeansthat$907isthecurrentequivalentofthesumof$1000tobereceivedafter2yearswitharateofreturnof5%,anditcouldbepossibletoreinvestthissumof$907somewhereelsetoreceivegreaterreturns.UsesThisconceptofPVfactorcanbeofgreatuseinestima