Question 1

What is the present value (PV) formula?

Accepted Answer

The present value of a single future sum is PV = FV / (1 + r)^n, where FV is the future value, r is the periodic interest rate (as a decimal), and n is the number of periods. For an ordinary annuity the formula is PV = PMT × [1 − (1 + r)^−n] / r.

Question 2

How do I choose the discount rate?

Accepted Answer

The discount rate usually reflects your opportunity cost of capital — what you could earn on a comparable-risk investment. Common choices: the risk-free rate (Treasury yield), your weighted average cost of capital (WACC), or a required return like 8-10% for equity investments.

Question 3

What's the difference between PV of a lump sum and PV of an annuity?

Accepted Answer

A lump sum is a single payment received in the future; you discount it once with PV = FV/(1+r)^n. An annuity is a series of equal payments; each payment is discounted separately and summed, which simplifies to PV = PMT × [1 − (1 + r)^−n] / r.

Question 4

Does the period have to be years?

Accepted Answer

No. The period just has to match the rate. If you use a monthly rate, use months for n. If you use an annual rate, use years for n. Use the dropdown to convert an annual rate to monthly or daily automatically.