How to Use Our Present Value Calculator
To find the present value, you need to know what you’re getting, when you’re getting it, and what your money could be earning in the meantime.
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Future Value ($): The single lump sum of money you expect to have or receive in the future.
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Discount Rate (%): This is the annual rate of return you could earn on an investment today. It’s also known as your “opportunity cost”—the return you’re giving up by waiting for the future money instead of investing a sum today. A higher rate means future money is worth less today.
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Number of Periods (Years): The number of years from now that you will receive the future value.
Understanding Your Results
The result of the calculation is the Present Value (PV). This is the amount of money that, if you invested it today at your specified discount rate, would grow to equal the Future Value over the number of years you entered.
It answers the question: “How much cash would I need to have in my hand today to be just as well off as receiving that specific amount in the future?”
The formula used to calculate present value is:
PV=(1+r)nFV
Where:
The Power of the Discount Rate
The discount rate you choose has a massive impact on the present value. Let’s say your goal is to have $20,000 in 10 years. The amount you’d need to invest today changes dramatically based on the return you can get.
As you can see, if you can earn a higher rate of return, the amount you need to invest today to reach your future goal is significantly lower.
Frequently Asked Questions
How do I choose the right discount rate?
Choosing the right discount rate is the most important step, and it depends on the situation:
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For setting a savings goal: Use the interest rate of the investment vehicle you plan to use, like the APY on your high-yield savings account.
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For evaluating an investment: Use your “opportunity cost.” This is the return you could get from an alternative investment with similar risk. Many investors use the historical average return of the S&P 500 (around 10%) as a benchmark.
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For personal finance: You might use an estimated inflation rate (e.g., 3%) to see how the purchasing power of future money compares to today’s.
What’s the difference between Present Value (PV) and Net Present Value (NPV)?
This is a critical distinction for investment analysis.
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Present Value (PV): Calculates the value of a single future sum in today’s dollars.
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Net Present Value (NPV): Calculates the value of all of a project’s cash flows (both inflows and outflows). It takes the present value of all future cash, adds them together, and then subtracts the initial investment cost. NPV tells you the total profitability of an entire project, not just one payment.
How does inflation affect present value?
Inflation erodes the purchasing power of money. When you use a discount rate that includes inflation (a “nominal” rate), the resulting PV reflects this. If you want to know what future money is worth in terms of today’s buying power, you can use the expected rate of inflation as your discount rate. For example, the present value of $100,000 in 20 years at a 3% inflation rate is $55,367. This means $100,000 in two decades will only buy what about $55,000 buys today.
What is an annuity?
An annuity is a financial product or investment that provides a series of equal, fixed payments over a set period (e.g., $1,000 every month for 10 years). Calculating the present value of an annuity requires a different formula than the one for a single lump sum. If you are dealing with a series of regular payments, you should use an [Annuity Calculator].
Why would I use a present value calculation?
PV is one of the most fundamental concepts in finance. Common uses include:
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Retirement Planning: Figuring out how much you need to invest today to reach your retirement nest egg goal.
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Lottery Winnings: Deciding between a lump-sum payout (a present value) and annual payments.
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Business Decisions: Evaluating the true value of future earnings from a potential project.
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Legal Settlements: Determining the current value of a future settlement payment.
Explore Related Financial Concepts
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See this calculation in reverse: find out what an investment made today will be worth down the road with our Future Value Calculator.
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If you are analyzing a project with multiple cash flows, calculate its total profitability in today’s dollars with our Net Present Value (NPV) Calculator.
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Dealing with a series of regular payments, like from a retirement plan or settlement? Our Annuity Calculator is the right tool for the job.
