๐ฐ Financial
Present Value Calculator
Determine the current worth of a future sum of money or stream of cash flows given a specified rate of return (discount rate).
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Formula
PV = FV / (1 + r)^nPV- Present Value (what it is worth today)
FV- Future Value
r- Discount rate (interest rate per period)
n- Number of periods
Example
Valuing a Future Payout
You are offered $10,000 in 5 years. If you could otherwise earn 6% on your money, what is that offer worth today?
- Identify parameters: FV = $10,000, r = 0.06, n = 5.
- Apply formula: PV = $10,000 / (1 + 0.06)^5.
- Result: The present value is $7,472.58. If someone offered you $7,500 today instead of $10,000 in 5 years, you should take the money today.
Frequently Asked Questions
The discount rate is your "opportunity cost"โthe rate of return you could earn on an investment with similar risk if you had the money today instead of in the future.
A higher discount rate means money today has more earning power. Therefore, a future payout is worth less in today's dollars because you are missing out on more potential interest by waiting.