How is Present Value calculated using the provided formula?

The calculation of Present Value (PV) is based on the principle of discounting future cash flows to account for the time value of money. The correct formula for Present Value is derived from the Future Value (FV) and the expected rate of return or interest rate (r) over a specific number of periods (n).

The formula used is FV divided by (1 + r) raised to the power of n. This approach essentially reverses the process of calculating Future Value, which involves accumulating interest over time on an initial investment. By dividing FV by (1 + r)^n, you effectively reduce the future amount back to its value today, reflecting the decrease in worth of future cash due to factors like inflation and opportunity cost.

This method allows individuals and businesses to assess how much they would need to invest today in order to achieve a specific future amount, thereby providing a more informed basis for making investment decisions. The assumption here relies on consistent compounding of interest, which is foundational in financial theory.

Other options misrepresent the relationship between present and future values or don't follow the established financial formulas for calculating PV, making option B the only appropriate choice in this context.