Donald invests the $10,000 today. Donald’s interest rate is 10% and interest is compounded and paid at the end of each year. At the end of two years, Donald’s investment is worth $12,100. What is the present value of Donald’s investment?

The present value of Donald's investment is $10,000.

When the investment's worth of $12,100 is discounted by the discount factor of 10% in two years, the resulting figure is $10,000 ($12,100)/1.21.

Explanation:

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.  To calculate the present value of an investment, the future cash flows are discounted at the discount rate.  The calculation of the present value is a consideration of the time value of money.  This means that money received today is worth more than the same amount received in the future.  So, to compensate for inflation, which alters the value of money due to time, it is expected that some interest be paid.  Any interest received above the inflation rate can be regarded as profit.

The Present Value Formula  is given as C/(1 + i)ⁿ, where

C = Future sum

i = Interest rate (with '1' equal to 100%)

n = number of periods.