Which formula is used to calculate present value?

The formula for calculating present value (PV) is essential in finance and helps determine how much a future sum of money is worth in today's terms, accounting for a specific rate of return (r) over a period of time (t).

The correct formula is expressed as PV = FV / (1 + r)^t. This formula shows that the present value is derived by taking the future value (FV) and discounting it back to the present using the interest rate (r). The exponent (t) represents the number of time periods until the future value is realized.

This formula is foundational in financial analysis because it allows investors to understand the value of future cash flows today, integrating the time value of money concept, which posits that money available today is worth more than the same amount in the future due to its potential earning capacity.

Other formulas listed do not reflect the present value concept accurately. For instance, some pertain to future value calculations or financial ratios rather than directly addressing the present value of future cash flows.