Present Value Calculator
Calculate the present value of a future amount based on a discount rate.
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Table of Contents
Present Value Formula
Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return.
Where:
- PV = Present Value
- FV = Future Value
- r = Discount Rate (as a decimal)
- t = Time Period (in years)
How to Calculate Present Value
To calculate present value, follow these steps:
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1Determine the future value (FV)
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2Convert the discount rate to decimal form (r)
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3Specify the time period in years (t)
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4Plug the values into the present value formula
Understanding Discount Rate
The discount rate is a crucial factor in present value calculations. It represents the rate of return that could be earned on an investment in the financial markets.
Risk-Free Rate
The theoretical rate of return of an investment with zero risk
Inflation Rate
The rate at which the general level of prices for goods and services is rising
Risk Premium
Additional return required to compensate for the risk of an investment
Present Value - Practical Examples
Example 1 Future Investment
Calculate the present value of $10,000 to be received in 5 years with a 5% discount rate.
PV = $10,000 / (1 + 0.05)^5 = $7,835.26
Example 2 Retirement Planning
Calculate the present value of $500,000 needed in 20 years with a 7% discount rate.
PV = $500,000 / (1 + 0.07)^20 = $129,209.17
Example 3 Education Fund
Calculate the present value of $100,000 needed in 10 years with a 4% discount rate.
PV = $100,000 / (1 + 0.04)^10 = $67,556.42