Present Value (PV) Calculator
Determine the current value of a future sum of money based on a specific discount rate.
Calculated Present Value
What is Present Value and the Discount Rate?
The Present Value (PV) is a financial concept that states an amount of money today is worth more than the same amount in the future due to its potential earning capacity. This core principle of finance suggests that, provided money can earn interest, any amount of money is worth more the sooner it is received.
The Discount Rate is the rate of return used to discount future cash flows back to their present value. It represents the opportunity cost of capital—the return you could earn on an investment of similar risk.
The Present Value Formula
To calculate the present value of a single future lump sum, we use the following formula:
- PV: Present Value
- FV: Future Value
- r: Annual Discount Rate (decimal)
- n: Number of compounding periods per year
- t: Total number of years
Example Calculation
Imagine you are promised a payment of 10,000 in 5 years. If the current market discount rate is 5% and interest is compounded annually, what is that payment worth today?
- Future Value (FV) = 10,000
- Discount Rate (r) = 0.05
- Periods (t) = 5
- PV = 10,000 / (1 + 0.05)^5
- PV = 10,000 / 1.27628
- PV = 7,835.26
This means that receiving 7,835.26 today is mathematically equivalent to receiving 10,000 in five years, assuming a 5% return rate.
Why the Discount Rate Matters
The choice of discount rate significantly impacts the result. A higher discount rate reduces the present value of future cash flows, reflecting higher risk or higher opportunity costs. Conversely, a lower discount rate results in a higher present value. Businesses use this calculation for Capital Budgeting and Discounted Cash Flow (DCF) analysis to decide whether a project or investment is worth its initial cost.