Present Value (PV) Calculation Instructional Guide

How to Calculate Present Value (PV) of Cash Flows?

What is the formula for determining the present value of cash flows that are projected to last indefinitely?

PV Calculation Step-by-Step Guide

To calculate the Present Value (PV) of cash flows that are assumed to last forever, you need to use the Present Value of Annuity formula. This formula helps determine the total present value of each cash flow, discounted back to the present using a discount rate.

The Present Value (PV) of an annuity formula is used in scenarios where cash flows are expected to continue indefinitely. It is calculated as follows:

PV = C / r

Where:

PV = Present Value

C = Steady Cash Flow

r = Discount Rate

The discount rate accounts for the temporal value of money and is essential in calculating the present value accurately. By using this formula, you can determine the present value of cash flows that are expected to persist indefinitely.