How to calculate present value factors?
The present value factor formula is below, and while it may look daunting at first glance, it is easy to remember after you work through it a few times! In the formula, rate represents the cost of capital or the discount rate, while periods equals the number of years.
Present Value Factor Formula Example:
Let’s say that the question tells you the cost of capital is 5% and you need to calculate the present value of a cash inflow 5 years from now? Using the formula, the rate would be 5% and periods would be 5 years. The 3 steps to calculating are as follows:
Step 1) Start by taking 1+5%, which equals 1.05
Step 2) Take 1.05^5 = 1.276282
Step 3) Divide 1 by 1.276282, which = 0.783526
Excel PV Factor Template
Utilize this free Excel template for calculating the present value using any discount rate or cost of capital. This template also includes a column to enter undiscounted annual cash flows to arrive at discounted cash flows.
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