Your Ask Joey ™ Answer

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.

Back To All Questions

You might also be interested in...

  • Discontinued Operations on the FAR CPA Exam

    Overview of Discontinued Operations In financial reporting, discontinued operations refer to a component of a company’s core business or product line that have been divested or shut down. Discontinued operations will be reported (net of tax) separately from continuing operations on the income statement. The reason that discontinued operations are reported separately is so that...

  • Equity Method Excel Workbook

    If you would like to use the Excel workbook that was used to create the Universal CPA lecture on the equity method, please click the link below to download the Excel workbook: Equity Method Lecture Example

  • How Hard is the CPA Exam?

    So you’re thinking about taking the CPA exam? Whether you have a dream of becoming a tax advisor, feel as though you need public accounting experience, or just want to solidify your business acumen, the CPA license is one of the most prestigious and well respected licenses in the business world. The exam itself is...