Present value calculator

This present value calculator calculates the present value of a single amount. By default, it calculates the present value of an $800 future amount at a 5% discount rate (I/Y) with 12 periods (N). To compute a different present value, simply modify at least one of the following fields: Future value (FV), Discount rate (%), or the number of periods (N). The present value field will automatically update as you make changes to these values.

Present value:
Total interest:

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Present value

Present value (PV) is a financial concept that represents the current worth of a sum of money to be received or paid in the future, adjusted for the time value of money. The time value of money acknowledges that the value of money decreases over time due to factors like inflation and the potential to earn returns on investments. The formula for calculating present value is:

\text{PV} = \frac{FV}{(1+r)^n}

where:

$PV$ represents the present value of the future cash flow.
$FV$ is the future value or amount of money to be received or paid in the future.
$r$ is the discount rate, which reflects the rate of return or the cost of capital, and accounts for the time value of money.
$n$ is the number of time periods until the future cash flow is realized.

In essence, the present value formula helps individuals and businesses make informed financial decisions by determining how much a future cash flow is worth in today’s terms, allowing for more accurate assessments of investments, loans, and other financial transactions.

Time value of money

Present value (PV) is closely related to the concept of the time value of money (TVM). The time value of money is the idea that the value of money changes over time due to several factors, including:

Opportunity cost: Money in your possession today can be invested or used to generate returns, which represents its opportunity cost. In other words, if you have money now, you have the chance to earn more with it.
Inflation: Over time, the purchasing power of money tends to decrease due to inflation. This means that the same amount of money will buy less in the future.
Risk: Money received or paid in the future is generally riskier than money received or paid today. There’s always uncertainty about receiving future payments as promised.

The present value calculation takes these factors into account by discounting future cash flows to their equivalent value in today’s terms. It answers the question: “How much is a future sum of money worth to me right now, considering the time value of money?”

The formula for present value, which I mentioned earlier, mathematically represents this relationship. It discounts the future cash flow (FV) back to its present worth (PV) by dividing it by the factor $(1+r)^n$ , where:

$r$ is the discount rate (representing the opportunity cost and the risk associated with the investment).
$n$ is the number of time periods until the future cash flow is realized.

In summary, present value is a financial tool used to quantify the impact of the time value of money on future cash flows. It enables individuals and businesses to make informed financial decisions by translating future values into their equivalent values in today’s terms, accounting for the factors that affect the value of money over time.