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Chapter 20. Building Discount Formulas > Calculating the Present Value

Calculating the Present Value

The concept of the time value of money tells you that a dollar now is not the same as a dollar in the future. You can't compare them directly because it's like comparing apples and oranges. From a discounting perspective, the present value is important because it turns those future oranges into present apples. That is, it enables you to make a true comparison by restating the future value of an asset or investment in today's terms.

You know from Chapter 18 that calculating a future value relies on compounding. That is, a dollar today grows by applying interest on interest, like this:


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