Why is present value considered to be the inverse of compound interest? Look at the equation...

Why is present value considered to be the inverse of compound interest?
Look at the equation PV = FV X (1 + k)^-n. Does this equation make sense?

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Expert Solution

The present value considered to be the inverse of compound interest because we are discounting the future cash flow to today's value. In the process of discounting the future cash flow, we take out all the interest that would have accumulated from the future cash flow to arrive at the present value.

In other words, the future value is the sum of the present value and the accumulated compound interest. The present value is the value without any interest.

Yes, the equation PV = FV X (1 + k)^-n makes sense. It can be simplified to:

PV = FV/(1 + k)ⁿ

Here we are discounting the FV for 'n' periods to today's value using 'k' as the discount rate.

jeff jeffy answered 2 years ago

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