Present Value and Future Value Formula in 2 Easy Steps
Hello and welcome once again to MBAbullshit.com Our topic for this video is Present Value.
So before anything else, I’d like to remind you that you can always go back to MBAbullshit.com
for your funny, easy tutorials.
It doesn’t matter whether you are business or college student or MBA or executive or
non-business moron like I was before.
Now, let’s get down to it.
I’d like to start with a story.
Let’s say that your grandmother gave you money when you were younger, a certain amount
of money and you don’t remember how much that money was.
Anyway, all you remember is that you put in a back for seven years and in the bank it
earned 6% interest rate.
After that seven years, you have $100.
Now the question is how much you think your grandmother gave you seven years before today
or seven years before it becomes $100.
In this problem, this $100 which is the amount after seven years, this $100 is called future
value.
The future value is written as FV in the formula.
This money, the amount that your grandmother gave you before the seven years is called
present value or past value.
It depends on how the story is told.
If I’m telling the story saying that $100 is today then the amount here is called past
value but if I’m telling the story saying that your grandmother gives this money to
you today and then in the future you get $100 then the money today is called present value.
I highly recommend using the word past value instead of present value because the word
present value can be confusing because the word present can change or the meaning of
the word present can change depending on how the story is told.
However, in business school your professor will almost always call this present value
even when he is talking about the past so don’t be confused about it.
Present value, past value, it is the same thing mathematically when used Math.
Anyway, the question is how do we compute the past value or the present value?
Well it is very simple.
We compute it by using a formula and in that formula we need all of these variables over
here.
We need the future value which we write as FV.
We need the past value or present value which we write as PV.
We have the interest rate which we write as R and we have the number of years which we
write as 7 and using these variables here, we make our formula over here.
So this formula may look very scary and intimidating but don’t panic because these things, all
these crazy letters and numbers over here just represent the stuff over here down here
which we already know.
In order to find out the present value here, we simply use the formula here as PV over
here is the same as the PV over here, present value or past value.
The FV over here talks about the future value which is the amount after the 6% interest
rate for seven years, simple as that.
One more thing, this FV over here is just one variable so don’t be confused.
This is not two variable F and V. No!
It is just one variable FV which means future value and that is $100 and it is the same
for PV.
This is just one variable PV.
It is not P multiplied by V as you might have learned in earlier Math when you were child
or in high school during Algebra.
Anyway, we move on now and see how we can use these variables and how we can plug these
figures into this formula up here.
It’s quite simple.
So we already know from the previous slide that the future value is $100 which is what
goes here.
We know that n is 7 which is what goes here.
We know that the interest rate is 6% which is what goes here.
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