The formula essentially discounts the future value back to the present by accounting for the interest that could be earned over the time period. Here$$s a step$-$by$-$step breakdown:

Calculate the Discount Factor: The term $((1+$ r$)^$n$)$ is called the discount factor. It represents how much a dollar today would grow over $($ n $)$ periods at the interest rate $($ r $).$

Divide the Future Value by the Discount Factor: By dividing the future value by the discount factor, you adjust the future amount to reflect its value in today$$s terms.

Example Calculation

Let$$s use John$$s case to illustrate:

$($ FV $=$ $$5,000,000)$

$($ PV $=$ $$2,330,716)$

$($ n $=25)$

We need to find $($ r $)$:

r$=($PVFV$)$n$11$

Plugging in the values:

r$=(2,330,7165,000,000)2511$

This calculation will give us the effective interest rate used to discount the future earnings to their present value.