Ace the CFP Exam 2025 – Master Your Financial Future with Confidence!

The formula for calculating the present value (PV) of a future sum (FV) discounted at a certain interest rate (i) over a specific number of periods (n) is PV = FV / (1 + i)^n. This formula effectively discounts the future value back to its present value by accounting for the time value of money.

The principle behind this formula is that money today has the potential to earn interest, which means that a sum of money in the future is worth less than the same sum today. By dividing the future value by (1 + i) raised to the power of n, the formula adjusts the future value down to what it would be worth in present terms, incorporating the interest rate and the number of time periods until the future value is realized.

In contrast, the other formulas listed do not accurately represent present value calculation. One involves multiplying rather than dividing, which would provide an inflated figure instead of the present value. Another formula suggests a method that lacks the necessary consideration for compounding interest over the specified time periods. Finally, the last option inaccurately adds interest to the future sum rather than calculating the present worth of that future amount, deviating from the expected application of the time value of money.