What is the PV Factor for a 5-year project at a 6% discount rate?

What is the PV Factor for a 5-year project at a 6% discount rate?

• A. PVF = (1.06)^-5
• B. PVF = (1.06)^-4
• C. PVF = (1.06)^-6
• D. PVF = 1 / 1.06

Answer: (A)

The present value factor for discounting a future cash flow uses the idea that money today is worth more than money later. For a cash flow to be received in t years at rate r, the factor is 1 divided by (1 + r) raised to the t-th power. So for five years at 6%, the present value factor is 1/(1.06)^5, which is (1.06)^-5. This yields about 0.7473, meaning a dollar received in five years is worth roughly $0.747 today. This exponent directly corresponds to the number of years you’re discounting. The other options reflect different time horizons: four years would use (1.06)^-4, six years would use (1.06)^-6, and a one-year period is just 1/1.06.

The present value factor for discounting a future cash flow uses the idea that money today is worth more than money later. For a cash flow to be received in t years at rate r, the factor is 1 divided by (1 + r) raised to the t-th power. So for five years at 6%, the present value factor is 1/(1.06)^5, which is (1.06)^-5. This yields about 0.7473, meaning a dollar received in five years is worth roughly $0.747 today.

This exponent directly corresponds to the number of years you’re discounting. The other options reflect different time horizons: four years would use (1.06)^-4, six years would use (1.06)^-6, and a one-year period is just 1/1.06.