Present Value Calculator
What a future sum is worth today, discounted at a given rate.
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Formula
How the calculation works
A sum promised for the future is worth less today, and how much less depends on the rate. 100,000 in ten years at 8% is worth 46,319 now, because 46,319 invested at 8% would become 100,000 in that time. The two calculations are the same one run in opposite directions.
The discounting compounds, exactly as growth does. The value does not fall by 8% a year in a straight line; it falls by 8% of a shrinking amount each year, so the decline is steepest at first. This is why a long-dated promise loses most of its present value early.
The rate is the whole argument, and it is not a fact. It should be what the money could otherwise earn, or what it would cost to borrow. Two people can agree on every number here and still disagree on the answer, because they are using different rates. That is why the tool asks rather than assuming.
Common mistakes
- Reading the present value as a prediction of the price. It is a valuation at one assumed rate, not a forecast.
- Using a rate that has nothing to do with your alternatives, which makes the answer arbitrary.
- Forgetting that the discount compounds, and subtracting a flat percentage of the future sum each year.
When to use it
- Use it to compare a payment promised later against money in hand now, and to judge whether a delayed payment is worth waiting for.
- It values a single future sum. A series of payments needs each one discounted separately, which this does not do.
Worked example
100,000 ten years away at 8% is worth 46,319 today, a discount of 53,681.
Common questions
What discount rate should I use?
Usually the rate the money could otherwise have earned. It depends on your alternatives, which is why the tool asks.
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