Present value of (PV) of the future sum (FV) to be received after a period ‘t’ for which discounting is done at an interest rate of ‘r’, is given by the equation
In case of discrete discounting: PV = FV / (1+r)t
Example 1: What is the present value of Rs.5,000 payable 3 years hence, if the interest rate is 10 % p.a.
PV = 5000 / (1.10)3 i.e. = Rs.3756.57
In case of continuous discounting: PV = FV * e-rt
Example 2: What is the present value of Rs. 10,000 receivable after 2 years
at a discount rate of 10% under continuous discounting?
Present Value = 10,000/(exp^(0.1*2)) = Rs. 8187.297
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