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I have been taught that to increase and decrease a number by a percentage we do the following: e.g. Increase by 5% and decrease by 5%. 100 * 1.05 = 105. (increase) 100* 0.95 = 95 (decrease) When I am looking at a present value formula we are told to do the following:

$$PV = \dfrac{FV}{(1+r)n}$$

Can someone explain to me why the two methods yield different results. Are they not essentially attempting to do the same thing i.e. reduce a given number by 5%? 100/1.05 = 95.23 100*0.95 = 95 I just can't seem to wrap my head around the concept, would really appreciate any help.

Harish Chandra Rajpoot
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Avo23
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  • PV is present value, FV is future value, so set PV=100 instead. – JMP Jul 10 '22 at 11:38
  • Example - If we are given a future value = 100 and we want to find the present value.

    Method 1. 100/1.05 = 95.23 (discounting by 5%)

    Method 2. 100*0.95 = 95 (reducing by 5%)

    I'm unsure why these give two different results.

     – Avo23 Jul 10 '22 at 16:25

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