Present Value Calculator

Introduction

Present Value (PV) is the current value of future cash flows or stream of cash flows, and the present value calculator helps you determine the present value of these cash flows so you can understand the best course of action with your investments and financial decisions.

These cash flows are discounted at an appropriate discount rate reflecting the investment’s expected return and risk profile.

How to use this calculator?

Using the Present Value Calculator, you can calculate the present value, discount rate, future value, and the number of periods by inputting the other variables required for the calculation.

The variables in the calculator are:

Future value
The investment’s value at a future time period.

Discount Rate
The rate at which we discount the cash flows. This could be interest rates or an appropriate rate reflecting the investment’s expected return and risk profile.

Number of periods
The number of periods after which the amount (FV) is received.

Compounding Frequency
The frequency of compounding of the asset or investment. This could be annual, semi-annual, quarterly, monthly, weekly, or daily.

Present Value
The investment’s value right now is at the current point in time.

What is Present Value?

The present value refers to discounting future cash flows using an appropriate rate of return reflecting the return and risk profile of the investments or cash flows to obtain its value in today’s terms.

Determining the appropriate discount rates to discount the cash flows is key to determining the value of the asset or investment.

One of the core principles in finance is that a sum of money is worth more now than the same sum of money at a future date due to its earning potential. This is called the Time Value of Money.

There are two primary reasons that support this theory:

1. The opportunity cost of capital: This is the investment opportunity that the investors forgo by choosing a particular course of action. The investor’s capital could be invested into other projects and also earn a higher return over time.

2. Inflation: The effects of inflation are also another risk to consider which actually erodes the return on investment and thereby future cash flows lose their value.

Investors and financial planners need to find the present value of investments to understand the equivalence of cash flows at different dates or points in time. This will help them make their investment decisions accordingly.

How is the Present Value Calculated?

We can calculate the present value using the following formula.

Present Value Formula

Where,

FV → Future Value
It is the value of the cash flow or asset at a future date.

r → Discount rate in % Per Annum
The rate at which the cash flows should be discounted. This could be interest rates or an appropriate rate reflecting the investment’s expected return and risk profile.

n → Time Period in Years
This is the number of periods after which we receive the cash flows.

k → Compounding Periods per year
This could be yearly, half-yearly, quarterly, monthly, weekly, or daily.

Compounding Frequency

Example

Person A will receive $50,000, 5 years from now. The prevalent interest rate in the market right now is 5% and it is compounded annually. What is the present value of this cash flow?

The present value is calculated as follows