What is the formula for calculating the present value of a single sum?

The formula for calculating the present value of a single sum is correctly represented by dividing the future value by the compounding factor, which is expressed as (1 + r)^n. This formula reflects the core principle of time value of money—essentially stating that a certain amount of money today is worth more than the same amount in the future due to its potential earning capacity.

In this formula, the future value is the amount of money you expect to receive in the future, r represents the interest rate (expressed as a decimal), and n indicates the number of periods until the future payment is received. By dividing the future value by (1 + r)^n, the formula discounts the future value back to its present worth, thus allowing one to determine how much that future sum is worth today considering the growth potential of capital over time.

This approach is essential in both finance and investment decisions, as it helps to assess the value of cash flows that occur at different times, emphasizing that the time and interest rate play critical roles in valuing money over different periods.