Present Value – PV

REVIEWED BY WILL KENTON AND CHRIS B MURPHY

Updated Jun 21, 2019

TABLE OF CONTENTS
EXPAND

 What Is Present Value – PV?

 PV Formula and Calculation
 What Does Present Value Tell You?
 Interest Rate or Rate of Return
 Inflation and Purchasing Power
 Future Value Compared With PV
 Discount Rate for Finding PV
 Future Value vs. Present Value
 Limitations of Using PV
 Example of Present Value

What Is Present Value – PV?

Present value (PV) is the current value of a future sum of money or stream of
cash flows given a specified rate of return. Future cash flows are discounted at
the discount rate, and the higher the discount rate, the lower the present value of
the future cash flows. Determining the appropriate discount rate is the key to
properly valuing future cash flows, whether they be earnings or obligations.

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Present Value

PV Formula and Calculation

\begin{aligned} &\text{Present Value} = \dfrac{\text{FV}}{(1+r)^n}\\
&\textbf{where:}\\ &\text{FV} = \text{Future Value}\\ &r = \text{Rate of
return}\\ &n = \text{Number of periods}\\ \end{aligned}
Present Value=(1+r)nFV
where:FV=Future Valuer=Rate of returnn=Number of periods
1. Input the future amount that you expect to receive in the numerator of the
formula.
2. Determine the interest rate that you expect to receive between now and
the future and plug the rate as a decimal in place of "r" in the denominator.
3. Input the time period as the exponent "n" in the denominator. So, if you
want to calculate the present value of an amount you expect to receive in
three years, you would plug the number three in for "n" in the denominator.
4. There are a number of online calculators including Investopedia's present
value calculator.