Present value calculator is a tool that helps you estimate the current value of a stream of cash flows or a future payment if you know there rate of return. Present value, also called present discounted value, is one of the most important financial concepts and is used to price many things, including: mortgages, loans, bonds, stocks and many, many more.
A lot of the world's economy is based on performing future value calculations. Money is worth more now than it is later due to the fact that it can be invested to earn a return. (You can learn more about this concept in our time value of money calculator).
Present value is also useful when you need to estimate how much to invest now in order to meet a certain future goal, for example when buying a car or a home. So, if you're wondering how much your future earnings are worth today keep reading to find out how to calculate present value.
If you find this topic interesting, you may also be interested in our future value calculator. Keep reading to find out how to work out present value and what's the equation for it.
Present value formula
To calculate the present value of future incomes you should use this equation:
- PV = present value
- FV = future value
- r = interest rate
Thanks to this formula you can estimate the present value of an income that will be received in one year. If you want to calculate the present value for more than one period of time, you need to raise the
(1+r) by the number of periods. This turns the equation into this:
n = number of periods.
This is the most commonly used present valuation model. It applies compound interest, which means that interest increases exponentially over subsequent periods.
How to calculate present value
If you read the previous paragraph you already know that to estimate present value you need to:
- Determine the future value. In our example let's make it
- Determine a periodic rate of interest. Let's say
- Determine the number of periods. Let's make it
- Divide the future value by
(1+rate of interest)^periods
In our example it will look like this:
100$/(1+0.08)2 = 85,73$
Now you know how to estimate the present value of your future income on your own, or you can simply use our present value calculator.
Other important present value calculations
Present value calculations are tied closely to other formulas, such as the present value of annuity. Annuity denotes a series of equal payments or receipts, which we have to pay at even intervals, for example rental payments or loans. This causes the equation to be slightly different. Click through to our present value of annuity calculator to learn more.