This present value calculator forecasts the current equivalent value of a future lump sum for a specific interest rate and a number of periods the interest gets compound. There is in depth information on how to estimate this financial indicator below the form.


Future value:*
$
Interest rate per period:*
%
Number of time periods:*

How does this present value calculator work?

This is a financial tool that aims to help you figure out the present value of a future lump sum by considering the following variables:

  • FV amount meaning the total you expect to receive in the future from an investment you make or to pay in certain cases for an investment you plan.
  • Interest rate per periodwhich is a fixed (most often referred to as annual) rate representing the cost for the money use.
  • Number of time periods which is the time frame in which the interest is compounded (year, twice a year, month.) and should refer to the same time frame as the interest rate per period.

  • Present Value [A] = FV/((1+r/100)^NP)

  • Interest [B] = FV – [A]

  • Compound interest factor [C] = 1 + ([B]/[A])

The algorithm behind this present value calculator applies the formulas detailed in the next rows:

Where:

FV = Future value

NP = Number of time periods

r = Interest rate per period

Apart from the 3 figures presented above this application also returns a detailed fact sheet showing the detailed evolution of the PV to the FV specified per each period.

Example of two results

Scenario 1: Let’s make the comparison between two cases and decide which one is preferably in terms of their present values:

- FV of $275,000, over 10 years with 5% interest per period. This will result in:

■ Present value: $168,826.14

■ Interest: $106,173.86

■ Compound interest factor: 1.62889

■ The evolution of the present value per each period is presented below:

Period Starting balance Interest Ending Balance
1 $168,826.14 $8,441.31 $177,267.45
2 $186,130.82 $8,863.37 $186,130.82
3 $195,437.37 $9,306.54 $195,437.37
4 $205,209.23 $9,771.87 $205,209.23
5 $215,469.70 $10,260.46 $215,469.70
6 $226,243.18 $10,773.48 $226,243.18
7 $237,555.34 $11,312.16 $237,555.34
8 $249,433.11 $11,877.77 $249,433.11
9 $261,904.76 $12,471.66 $261,904.76
10 $275,000.00 $13,095.24 $275,000.00

- FV of $300,000, over 9 years with 4.5% interest per period. This will result in:

■ Present value: $201,871.33

■ Interest: $98,128.67

■ Compound interest factor: 1.48610

■ The evolution of the present value per each period is presented below:

Period Starting balance Interest Ending Balance
1 $201,871.33 $9,084.21 $210,955.54
2 $220,448.54 $9,493.00 $220,448.54
3 $230,368.72 $9,920.18 $230,368.72
4 $240,735.31 $10,366.59 $240,735.31
5 $251,568.40 $10,833.09 $251,568.40
6 $262,888.98 $11,320.58 $262,888.98
7 $274,718.99 $11,830.00 $274,718.99
8 $287,081.34 $12,362.35 $287,081.34
9 $300,000.00 $12,918.66 $300,000.00

Scenario 2: If an individual sets up a savings goal of $150,000 over 25 years until retirement, at an average interest rate of 4.5% compounded annually, how much money should him deposit today?

Present value: $62,196.43

Interest: $87,803.57

Compound interest factor: 2.41171

The evolution of the present value per each period is presented below:

Period Starting balance Interest Ending Balance
1 $62,196.43 $2,798.84 $64,995.27
2 $67,920.06 $2,924.79 $67,920.06
3 $70,976.46 $3,056.40 $70,976.46
4 $74,170.40 $3,193.94 $74,170.40
5 $77,508.07 $3,337.67 $77,508.07
6 $80,995.93 $3,487.86 $80,995.93
7 $84,640.75 $3,644.82 $84,640.75
8 $88,449.58 $3,808.83 $88,449.58
9 $92,429.81 $3,980.23 $92,429.81
10 $96,589.15 $4,159.34 $96,589.15
11 $100,935.66 $4,346.51 $100,935.66
12 $105,477.77 $4,542.10 $105,477.77
13 $110,224.27 $4,746.50 $110,224.27
14 $115,184.36 $4,960.09 $115,184.36
15 $120,367.66 $5,183.30 $120,367.66
16 $125,784.20 $5,416.54 $125,784.20
17 $131,444.49 $5,660.29 $131,444.49
18 $137,359.49 $5,915.00 $137,359.49
19 $143,540.67 $6,181.18 $143,540.67
20 $150,000.00 $6,459.33 $150,000.00

What is present value?

In economics, often abbreviated as PV this is the current worth of a future amount of money or by case the equivalent value of a stream of cash flows by considering a specific rate of return within a certain number of periods. Please note that the return rate and the number of period should refer to the same time frame. For instance if the number of periods is considered to be years, then the return rate should be yearly.

Why is this financial indicator important?

From its definition we may say that it is a figure of how much money you need to invest today in order to earn a specific future value within a defined time frame and with an assumed rate of return. Thus it is critical to check it in case you plan an investment and try to decide between two options you may have. For instance you may need to decide either to deposit your money or invest in other instruments or plans.

As its formula shows the future value is discounted to reflect the time value of money, it may also prove helpful in some case when you need to know which is the value in today’s money of a certain amount of cash you will pay in the future.

05 Feb, 2015 | 0 comments

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