Example with formular Present Value (PV), Future Value (FV), Target Price and Point of Total Assumption

22. Present Value (PV)

Formula: PV = Future Value / (1 + i)n 

Present Value (PV) considers the time value of money. This is useful to calculate what a future amount of money would mean today if adjusted for time. ‘i’ represents the interest rate or the discounting rate. ‘n’ represents the number of time periods. The period used should be the same for both variables. If the interest rate is 10% and the time period is 5 years. A Future Value of $20,000 will have a Present Value as calculated below 

Future Value / (1 + i)n 

20000/ (1+ 10%) 5 


This means a future value of $20,000 in 5 years has a present value of $12,418 as of now.  

23. Future Value (FV)

Formula: FV = Present Value x (1 + i)n 

Future Value is an estimate of what a fixed amount of money would be valued at a given point of time in the future. ‘i’ is the interest rate and ‘n’ is the number of time periods. If Present value is $20,000, ‘i’ is 10% and time period is 5 years. Then we can calculate the Future value as  

Present Value x (1 + i)n 

20000 x (1+0.1)5 


The Future Value of $20,000 in 5 years if the interest rate is at 10 percent will be $32,210 

24. Target Price

Formula: Target Price = Target Cost + Target Fee 

This is a simple addition of estimated cost and an agreed fee that is given to the seller on top of the target cost. This is useful when calculating price per unit. If Target Cost is $100 and Target fee is $20 the Target price will be Target Cost + Target Fee 

100 + 20 

In this case we get a Target price of $120

25. Point of Total Assumption

Formula: PTA = [(Ceiling Price — Target Price) / Buyer’s Share Ratio] + Target Cost 

Point of Total Assumption is the point at which the seller has incurred costs that have stopped the project from being profitable. Any expense beyond the PTA is an additional expense incurred by the seller.  If Ceiling Price is $25, Target Price is $20, Buyer’s share ratio is 5 and Target cost is $15 then we could calculate PTA as follows  

[(Ceiling Price — Target Price) / Buyer’s Share Ratio] + Target Cost 

[[25-20)/5] +15 

With the above details we get a PTA of $16

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