Mathematical Formulation

Since finding present value is simply the reverse of compounding, he formula for compounding of the sum can be readily transformed into a present value formula. As shown in the preceding section, according to the compounding formula, A = P(1 + i). Therefore, the present value equation becomes:


in which P is the present value for the future sum to be received or spent; A is the sum to be received or spent in future, i is interest rate, and n is the number of years. Thus, the present value of money is the reciprocal of the compounding value.

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