Present Value Calculator
This present value calculator can be used to calculate the present value of a certain amount of money in the future or periodical annuity payments.
Present Value of Future Money
Present Value: $558.39
Total Interest: $441.61
Present Value of Periodical Deposits
Present Value: $14,720.17
|FV (Future Value)||$26,361.59|
|start principle||start balance||interest||end balance||end principle|
Would you rather have $5,000 right now or $5,000 five years from now?
We think you would probably rather have the $5,000 right now? Most people intuitively choose that option. Cash in hand, and all that...
If you would rather have it now, you recognize the way time and money are related. Cash in hand is money you can invest or spend. Cash five years from now isn't worth the same thing.
Five years is a long time to wait. Even if you didn't want to spend $1,000 right now, you could put the money received today into a deposit account earning interest for five years. If you got 4 percent interest on $1,000, then after five years your money would have grown to $1,217. Why choose to have $1,000 in five years when you could have $1,217 by taking $1,000 now and investing it?
Time Value of Money
The time value of money represents the interest one might earn on a payment received today, if it was held earning interest until a future date.
The longer you put your money out of reach, the less it is worth. You therefore need to expect a higher return on your investment to compensate you.
This is the best reason to start investing early on in life. The surest way to win at investing is to put small sums in an interest-bearing account or asset. It is a much more successful strategy than investing large sums for a short time. By saving $600 a month, at an annual return of 9 percent, you will have $1.03 million after 30 years.
But what if your future payments are not guaranteed? What if the investment that pays the 9 percent ‐ and it would not be easy to get such a high rate on a savings account ‐ isn't certain?
Without the certain guarantee that you'll eventually be paid the full amount, the future value of the same sum of money is even lower because uncertainty as well as time value makes it less attractive.
A discount rate is used to calculate the present value of the future uncertain payment. This discount rate reflects both time value and risk.
So how can you understand what holding an investment over time should be worth? Discounting is the procedure of finding what a future sum of money is worth today. Use the projected future value of an investment to find the present value. You need to know the projected future value, the number of time periods in question, and the interest rate. The interest rate, in this context, is more commonly called the discount rate.
The discount rate represents some cost (or group of costs) to the investor or creditor. The sum of these costs amounts to a percentage which becomes the interest rate.
We've talked about the importance of risk. There is a chance that you will not get your money back because it is a bad investment, the debtor defaults, or f or some other unknown reason. You require compensation for taking on that risk.
The other important risk is inflation. The $1,000 you invest today will only be worth $800 in a few years if inflation becomes high. Inflation means prices go up, so that your money doesn't buy as much. There is also a danger from deflation, which is a long period in which consumers stop buying things and economic growth is slow. This can also reduce the value of your money, as the central bank may choose to increase the money supply to stimulate growth, effectively making your money worth less.
How does this work in practice? Suppose you expect $1,000 dollars in one year's time ‐ future value is $1,000. To determine the present value, you would need to discount it by some interest rate that incorporates the risks. If this discount rate were an annual 5 percent, the $1,000 in a year's time would be the equivalent of $952.38 to you today.
To turn the process around, suppose you are to receive the money in one year? You are aware that waiting a year for the money entitles you to interest.
Suppose you have to choose between receiving $100 today, or in one year? If we assume the interest rate is 5 percent annually, you should be offered at least $105 in one year instead of receiving so that two options are equivalent (either receiving $100 today or receiving $105 in one year).