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