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I have a requirement to calculate the present value of a future value taking into consideration an interest rate and tax rate. This is to be used in an insurance calculator so I need the answer to be a formula rather than in excel.

Given the example of a FV worth $175,000 in 20 years time, how do I calculate the PV of this amount with an annual interest rate of 5% accumulating on the principle and a tax rate of 20% which only applies to the interest earned on the principle?

Inflation does not apply as there are no drawings over the period.

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The easiest way is to use the PV function in Microsoft Excel or Google Sheets. Due to the 20% tax, the interest rate is effectively 4% instead of 5%. The formula to use (assuming annual compounding of interest) is PV(0.04,20,0,175000): 4% interest, 20 periods (years in this case), no periodic payments, future value of $175,000. The answer is $79,867.72.

EDIT: Just saw that you wanted the formula rather than an Excel function, my bad. The formula is FV = PV x (1 + r)^n. FV is 175000, r is 0.04, n is 20. Solve for PV and you get 79867.72.

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  • Thanks Craig, it's easy when you know how. You have the FV formula in your solution, however I get the idea.
    – Brett G
    Commented Feb 9, 2016 at 23:28

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