What is the formula for present value (PV)?

The formula for present value (PV) is essential in finance for determining the current worth of a cash flow that is expected to be received in the future, taking into account a specific rate of return or discount rate (r). The correct formula, PV = FV / (1 + r)^n, reflects this computation, where FV represents the future value of the investment or cash flow, r is the discount rate, and n is the number of periods until the cash flow is received.

This formula shows that to find the present value, you divide the future value by the factor (1 + r)^n, which accounts for the time value of money. It underscores the principle that money available today is worth more than the same amount in the future due to its potential earning capacity.

The other options do not accurately represent the concept of present value. The first option implies an incorrect addition of future and compounded values, while the third option erroneously suggests multiplication rather than division, failing to capture the necessary discounting to present value. The last option also misrepresents the relationship by using subtraction instead of appropriate division. Thus, the formulated option correctly embodies the fundamental relationship in the time value of money, making it the right choice.