What is Present Value?
Present value (PV) is a method of measuring the current worth of a future sum of money. It is used to compare the value of money today to its value at some point in the future, taking into account the time value of money and inflation. This means that a certain amount of money today will have a different value in the future due to inflation and other factors.
How to Calculate Present Value?
The present value formula is used to calculate the present value of a future sum of money. It is calculated by dividing the future sum of money by the present value discount rate, which is the interest rate of the investment, plus one. The formula is as follows: PV = FV / (1 + r)n Where:
- PV = Present Value
- FV = Future Value
- r = Interest Rate
- n = Number of Periods
Examples of Present Value
Let’s look at an example of how present value works. Suppose you have a savings plan where you set aside $100 each month for five years, earning a 5% interest rate. The future value of this investment would be $7,621. To calculate the present value of this investment, we can use the present value formula: PV = 7,621 / (1 + 0.05)5PV = $5,400 This means that the present value of the investment is $5,400. This is the amount you would need to invest today in order to have a future value of $7,621 in five years.
Conclusion
Present value is a useful tool for measuring the current worth of a future sum of money. It is important to understand the concept of present value in order to make informed financial decisions. For more information on present value, please visit the following links: