The Present Value in Detail
The present value of your money is the future value of it discounted in order to reflect on its current value.
A simpler explanation of present value is, if you are going to receive a set amount of money in the future, our present value calculator will help you understand the value of that amount as of today.
You can apply the present value of something to multiple things on a daily basis. Lets take your kids college education for example. With the fees going to be a total of £30,000 after 10 years, using the present value you are able to calculate if your present savings are enough to pay for this in 10 years. If we take an annual interest rate of 4%, after 10 years the present value of that £30,000 will be £20,266.93. If you already have sufficient savings, you need not worry.
Calculation of Present Value
To calculate the present value of an amount, you need to have the figures below:
Future value: You cannot calculate the present value until you already know what the future value is. The future value is the amount that you will receive in the future.
Number of payments: This can be in either months or years, and refers to the term of your payments. In the example we used the number of payments is 10, since it will take 10 years.
Interest rate: With the help of the interest rate you are able to calculate what the present value of an amount will be on a future date.
Frequency of Payments: The frequency of your payments may vary from monthly, to quarterly, 6 monthly, and of course yearly.
Payment Amounts: The payment amounts are the amounts that are required in order to reach a certain future value.
Present Value Formula
Present Value (PV) = FV / (1 + r) n
PV = the Present Value,
FV = the Future Value,
r = the interest rate (as a decimal),
n = the number of periods
Present Value Applications
Present value calculations are also very useful when it comes to bond yields and pensions, as well as savings accounts. It is a very important financial concept and can be helpful to those who are making financial investments.
Our Present Value Calculator is useful for calculating the present value of a variation of scenarios.
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