Present Value Calculator
Use this online calculator to determine the Present Value, also known as the Present Worth, of a future sum of money or cash flow stream based on the rate of return (discount rate) and the investment term. It can calculate the present value of an annuity or any other type of periodic payments.
Using the PV calculator
Our Present Value (PV) calculator is a user-friendly tool that helps you calculate the present worth of a future asset. To use the calculator, input the expected future value (FV), the discount rate or return rate per period, and the number of periods over which the value will accumulate (N). Once these are filled in, press “Calculate” to see the present value and the total interest accumulated over the period.
What is Present Value?
Present Value, also known as Present Worth, is the current value of a future sum of money or cash flow stream, given a rate of return over a specified number of periods. It is based on the principle of time value of money, which states that receiving a sum of money today is worth more than receiving the same amount in the future. It is similar to a compound interest calculation done backwards, and is used in finance and stock valuation.
However, Net Present Value (NPV) is a more commonly used method in financial analysis, investment assessment, and accounting, such as in calculating capital expenditure and depreciation. NPV takes into account both positive and negative cash flows, while PV only considers positive cash flows. PV can be useful in certain situations, but NPV is generally preferred by experts.
To calculate PV manually, you can use the following formula:
PV = FV / (1 + r)^n
where FV is the future value, r is the return rate, and n is the number of periods. For example, with a period of 5 years and expected future value of $1,000,000, given a return rate of 8%, n is 5, FV is $1,000,000 and r is 0.08, leading to the calculation: $1,000,000 / (1.08)^5 = $680,583.20 . The formula is straightforward to use and can be applied in Excel to create your own calculation table.
If the discount rate is annual, and the period is a year, this formula is equivalent to the present value of annuity formula, which is also used in our PV calculator.
Present Value calculation example
If an investment of money is made with an annual discount rate in the form of an interest rate on a bank deposit, and the future value of the investment is known or estimated to be $100,000, the present value of this investment can be determined using the present value formula. The present value is calculated by assuming the investment will receive the future value of $100,000 in 1, 2, 3, 5, or 10 years from now. The results of the present value calculation based on the present value formula are shown in the table below.
|Future Value||Rate of Return||Number of Years||Present Value|
This example illustrates the principle of time value of money through basic calculations of present value. As the time frame for receiving the future value of the investment increases, the present value of the annuity decreases, assuming the future value and rate of return remain constant. In other words, in order to maintain the same present value, the interest rate would need to increase along with the number of years that the investment is locked in. To put it simply, a higher discount rate is required to justify a long-term investment.