This present value calculator finds the PV/deposit required to achieve a specific future value by considering the no. of time periods, discount rate & compounding. There is in depth information about this indicator below the tool.
How does this present value calculator work?
This financial calculator allows you determine the present value an investment will need by taking account of the following variables that should be given:
- Future value lump sum (FV) which represents the amount of money to be achieved/generated at the end by the business (in many cases this is considered the savings goal).
- Number of periods (t) is the time frame the investment runs that can be for instance years or months or even decades in case of long term investment projects.
- Discount rate per period (r) is the rate of return per period. Usually is it considered to be the nominal interest rate per period expressed as a percentage.
- Compounding per Period (m) refers to how often the interest gets capitalized in a single period.
The algorithm behind this present value calculator uses the PV formula explained here:
PV = FV / ((1 + i) ^ n)
i = r / (100 * m)
n = t * m
Example of a minimum required deposit with annual compound interest
Let’s figure out how much should an individual deposit in case he wants to end up with $100,000 (FV) after 5 years (t), in case the annual interest rate is 4.45% (r) compounded annually (m = 1)?
Answer: He should invest initially $80,437.35.
What if the interest is compounded monthly (m = 12)? In this case the number of periods (t) is 5 * 12 = 60 months and the interest rate per period is 0.0445/12 which finally means that r = 0.370833.
Answer: He should deposit $80,054.27.07 Apr, 2015 | 0 comments