## Present Value of Money

The Present Value is the value of money at a point in time.  Let's explain this using an example.  Say we have \$1000 which has been sitting in a bank accumulating 5% interest for the past 6 years but we don't know how much we put into the bank to get the \$1000. The value which we put in the bank 5 years ago is known as the Present Value.  It can be confusing because Present refers to now but in business terms in the above example Present Value is the Past Value. While the \$1000 is known as the Future Value in this example.  The formula for Calculating Present Value is as follows.

PV=FV(1+r)-n

Where;
PV=Present Value (Not yet know)
FV=Future Value, \$1000
r=Rate, 5%
n=time reflected in years, 6

Our formula looks like this;

PV=1000 (1.06)-6

So we can use Excel to Calculate the answer for Present Value;

=1000*(1.05)^-6

The above example is of the data keyed into Excel.  The formula is as follows.

=B2*(1+B3)^-B4

\$742 Invested= PV

5% for 6 Years

Money grows to \$1000=FV

You can see from our example that the answer is \$746.  So 6 years ago we would have put this money in the bank to achieve \$1000 today.  The file attached shows the above method and Excel's PV formula.