How To Derive Present Value Formula Complete Guide

David shows derivations for two different formulas for the present value of a series of regular payments starting one time period in the future. This present value figure is the basis for a sale price. Define the discount factor.

The present value of a growing perpetuity is 4A5 Multiplying this equation by 1 r we get 4A6 Multiplying Equation 4A5 by 1 g we get 4A7 Now subtracting 4A7 from 4A6 we have 4A8.

Mathematically this is also known as a geometric series. The present value of a constant cash flow C for t periods is. Create a forecast of the expected cash flows of the business for at least the next five years and then derive the present value of those cash flows. The present value of an annuity calculation is only effective with a fixed interest rate and equal payments during the set time period.