Present Value Calculator
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 their 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.
Many of the world's economies are based on 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 the 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 = FV / (1 + r)
- PV – Present value;
- FV – Future value; and
- 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:
PV = FV / (1 + r)n
- 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 section, you already know that to estimate the present value, you need to:
- Determine the future value. In our example, let's make it $100.
- Determine a periodic rate of interest. Let's say 8%.
- Determine the number of periods, n. Let's make it 2 years.
- Divide the future value by (1 + rate of interest)n.
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.
What is present value?
The present value of an investment is the value today of a cash flow that comes in the future with a specific rate of return.
That means, if I want to receive $1000 in the 5th year of investment, that would require a certain amount of money in the present, which I have to invest with a specific rate of return (i).
For example, if i = 20%, the present value would be $401.88.
How to use present value for investing?
There are two main ways you can use Omni Calculator present value tool:
To calculate how much you should invest now for a specific cash flow in the future, given the yearly return.
Given the desired future cash flow, the rate of return, and its present value, you can use the tool to determine how much time you have to leave the money compounding (gaining interest).
What is the present value of a cash flow of $1000 in 5 years?
$620.92. Here is how this answer is calculated:
- We have to define the rate of return (i). If you don't know, you can try any in the OmniCalculator Present Value tool.
- Suppose we take i = 10%. Then, we divide $1000 by the result of (1 + i) to the power of 5, or 1000/(1.1)⁵
- We obtain $620.92, the present value of $1000 in 5 years with a rate of return of 10% annually.
How to know if a present value of an investment is good or bad?
Here's what you need to do to answer this question:
Acknowledge all the future cash flows that will come in the future and their specific time.
Bring all those future cash flows to the present, meaning we have to calculate their present value. You could try Omni Calculator present value tool for this step.
Sum all the present values, then subtract the initial investment from that sum. If the final result is positive, then it is a good investment.