Present Value Explained: What Future Money Is Worth Today
Present value helps you compare money at different points in time on a fair basis. This guide explains discounting without jargon.
What is the Present Value Calculator?
This calculator discounts a future amount back to today using the formula present value = future value divided by (1 + r) raised to the power of t, where r is the annual discount rate and t is the number of years. The difference between the future amount and the present value is the discount, which reflects the fact that money available later is worth less than money available now.
How to use it
- Enter the amount you expect to receive in the future.
- Enter the annual discount rate and how many years away it is.
- Press Calculate to see its value in today's money and the discount.
Worked example
A sum of 20,000 due in 5 years, discounted at 5% per year, has a present value of 15,670.52 and a discount of 4,329.48.
What is present value?
Present value is what a future sum is worth right now, once you allow for the return you could earn in the meantime. You divide the future amount by one plus the discount rate, raised to the number of years. The longer you wait, or the higher the rate, the lower the present value becomes.
Frequently asked questions
Why is future money worth less today?
Because money today can be invested and earn a return, while money in the future cannot. Discounting adjusts for that lost opportunity over time.
What rate should I use?
Use a rate that reflects the return you could earn elsewhere or the cost of waiting, such as a savings or investment return. A higher rate gives a lower present value.