Present Value Calculator
Determine the current value of a future sum of money based on a specific discount rate.
What is Present Value (PV)?
Present Value (PV) is a fundamental financial concept that determines the current worth of a future sum of money or stream of cash flows given a specific rate of return (the discount rate). It is based on the "time value of money" principle, which posits that a dollar today is worth more than a dollar in the future due to its potential earning capacity.
The Present Value Formula
To calculate the present value of a single future payment, the following mathematical formula is used:
Where:
- PV: Present Value (the current worth of the money).
- FV: Future Value (the amount to be received in the future).
- r: Annual discount rate (decimal format).
- n: Number of times interest compounds per year.
- t: Time in years.
Why Calculate Present Value?
Investors and business owners use PV to evaluate the attractiveness of an investment. If you are offered a payout of $50,000 in ten years, knowing the PV helps you decide if it is worth more or less than an immediate investment today. It is also the backbone of discounted cash flow (DCF) analysis, which is used to value companies, bonds, and real estate projects.
Example Calculation
Suppose you want to have $10,000 in 5 years. If you can earn an 8% annual return (discount rate), how much do you need to invest today?
Using the formula: 10,000 / (1 + 0.08)^5 = 10,000 / 1.4693 = $6,805.83.
This means that $6,805.83 invested today at an 8% annual return will grow to $10,000 in five years.