Calculating Present Value in Today’s Dollars

Posted by Brendan Flaherty, CFP®, CIMA®

May 31, 2016 5:31:23 PM

What is the present value of $100 in today’s dollars in three years, if you assume inflation at a 3.5% rate and that the annual average after-tax rate investment is 9% (assuming a yearly compound rate)?

There are two ways of computing the answer.

The One-Step Inflation-Adjusted Method:

    • n = 3
    • i = 1.09 / 1.035 – 1 x 100 or 5.314
    • FV = $100
    • PV = ($85.61) solution

The Two-Step Method:

First, determine the future value using the inflation rate:

        • n = 3
        • i = 3.5
        • PV = ($100)
        • FV = $110.87

Next, using the 9% nominal rate, determine how much money you need today to obtain $110.87 in three years:

        • n = 3
        • i = 9
        • FV = $110.87
        • PV =($85.61)

As you can see from both methods outlined above, $85.61 is the value needed today.

Topics: Time Value of Money, Course 1: Intro to FP, HP 12c Video Tutorials

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