Present value (PV) refers to the current value of a future sum of money or stream of cash flows. The future sum of money is expected to be generated considering a specific return rate. The present value calculation is essentially a discounting of the future cash flows.
In simple terms, PV is like reverse compound interest. You calculate the PV from the Future Value (FV) by discounting the future value at a certain rate. The higher your discount rate, the lower the present value.
Understanding the present value helps you assess the future fairness of an investment. Alternatively, it helps you assess the amount you need to set aside to reach a certain future value.
The present value calculator is an online tool that helps you compute the PV of a sum of money in the future. Using this calculator is helpful and essential for long-term investments.
This is because it lets you estimate the current value of assets and whether or not they will build up to the required corpus. If the estimated returns fail to reach the amount you were hoping for, you could make an informed decision to invest in other instruments.
Using a PV calculator, you can also determine the sum you need to invest today for a future financial goal. For the present value calculation, you will need to input the following details:
The future sum value you are aspiring to achieve
The time period (typically calculated in years)
Rate of interest
Frequency of compounding
Cash flow payments to be made
The growth rate of annuities
Once you have the above details, you can follow the steps outlined below to use the present value calculator:
Assess and estimate your future requirements and enter the amount you hope to gain in the future
Calculate the annual interest and discount rates and enter the value into the required field
Enter the number of years in the field, marking the period
Submit the details to get the present value of the amount you need in the future
Knowing the benefits is also imperative now that you know how to use a present value calculator.
Here are some of the benefits of the present value calculation with a calculator:
You need not carry out manual calculations, which can be tedious and prone to errors. With an online calculator, you can easily calculate the PV and make the right decision.
Annuity plans are a boon, especially once you retire and no longer draw a regular income. You can choose the best annuity plans that align with your retirement needs using the PV Calculator..
One way to assess whether an instrument is good is to compare the costs with the returns. A present value calculator is a reasonably accurate tool as it helps estimate an asset’s future worth and profitability, which you can use to determine the cost.
By calculating your future goal’s present value, you can assess how much money you require to set aside for making investments for your future. Once you ascertain the amount you need to invest today, you can immediately begin taking measures to have that amount.
The discount rate is usually calculated while performing the present value calculation, which takes inflation into account. As a result, the current value calculation allows you to decipher your assets' future value without stressing about how inflation may negatively impact them.
The present value formula is simple, but manual calculations may take a while, and online calculators may be a better alternative. However, despite this, it is essential to know the formula to calculate the present value.
At the core of it, the present value is just the current value of a future amount plus future cash flows and/or annuity payments. The formula for calculating the PV is as follows:
PV = FV/(1+i)n
FV = Future Value
t = Number of Time Periods
R = Rate of Interest
n = Compounding Frequency
Decisions relating to investments can often take a lot of time. Finding the best investment aligning with your requirements by knowing the present value is one of the best ways to assess an asset’s worth.
In addition, understanding the current value with a present value calculator will help ensure that your investments can cover your future expenses and requirements. Once you know which instrument to invest in and how much to invest, you can easily invest via Bajaj Markets.
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While PV is the present value or the initial amount, the FV or the future value is the final amount. According to the formula, PV equals FV divided by 1 plus the applicable interest rate for each period raised to the maximum number of periods.
This is the mathematical formula to calculate PV from FV: PV = FV/(1+i)^n
When you invest, various factors, such as inflation and other geopolitical conditions, affect your returns. Remember that the money you invest today never equals the same amount in the future.
Hence, using a present value calculator helps you determine the amount you must invest today, which can help you align with your financial objectives. This calculator also aids in choosing the best investment option.
This is important as it lets you assess whether or not your investment decision is accurate. When you calculate present and future values for any investment, you are aware of the amount you can earn over a significant period. Based on that, you can assess if the accumulated corpus is enough for your requirements.
The present value aids in calculating the value of future cash flow in today’s scenario. On the other hand, the future value helps derive the value of the current cash flow based on the growth rate assumptions.