What is a PV Factor?

A PV Factor (Present Value Factor) is a financial term used to determine the present value of a future cash flow. It is a discounting factor that converts future cash flows into their present value by accounting for the time value of money.

Formula:

Where:

rrr = discount rate (or interest rate)
nnn = number of periods

Usage:

The PV factor is used in Net Present Value (NPV) calculations to discount future cash flows.
It is essential for valuing investments, bonds, leases, and other financial instruments that generate future cash flows.
It helps compare different cash flows occurring at different times by converting them into today's dollars.

Example Calculation:

If you expect to receive $1,000 in 3 years, and the discount rate is 5%, the PV factor for year 3 would be:

‍

Multiplying this by the future cash flow:

‍

This means that $1,000 received in 3 years is worth $863.80 today, assuming a 5% discount rate.

What is a PV Factor?