Present Value Calculator

How to Calculate Present Value

Present Value (PV) is a fundamental concept in finance that allows us to determine the current worth of a future sum of money, given a specified rate of return. This calculation is crucial for making informed investment decisions and comparing different investment opportunities.

Present Value Formula

The formula for calculating Present Value is:

$$PV = \frac{FV}{(1 + r)^n}$$

Where:

• PV = Present Value
• FV = Future Value
• r = Annual Interest Rate (as a decimal)
• n = Number of Years

Calculation Steps

1. Identify the Future Value (FV) of the investment.
2. Determine the Annual Interest Rate (r) and convert it to a decimal (divide by 100).
3. Specify the Time Period (n) in years.
4. Plug these values into the Present Value formula.
5. Calculate the result to find the Present Value.

Example Calculation

Let's calculate the Present Value for an investment with the following parameters:

• Future Value (FV) = $10,000
• Annual Interest Rate (r) = 5% = 0.05
• Time Period (n) = 3 years

Step 1: Identify the values

FV = $10,000, r = 0.05, n = 3

Step 2: Plug the values into the formula

$$PV = \frac{10,000}{(1 + 0.05)^3}$$

Step 3: Calculate

$$PV = \frac{10,000}{1.157625} = 8,638.38$$

Therefore, the Present Value is $8,638.38

Visual Representation

This diagram illustrates the relationship between Present Value and Future Value over time for our example calculation. The blue line represents the Present Value, which increases over time to reach the Future Value. The orange line shows the constant Future Value of $10,000. At year 0, we see the calculated Present Value of $8,638.38, which grows to $10,000 by year 3 at a 5% annual interest rate.