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Present value (PV) refers to the current value of a future sum of money or stream of cash flows expected to be generated considering a specific return rate. Present value essentially presents the concept that an amount of money today is worth significantly more than the same amount in the future. It suggests that money received in the future is valued much less than the equal amount if received today. Present value calculation considers the rate at which future cash flows will be discounted. Future cash flows, earnings and debt obligations can only be valued by estimating the most accurate discount rate the asset will likely see. It is important to note that the higher your discount rate is, the lower the present value of your future cash flows are going to be. 

 

Inflation deflates the value of the funds by increasing the number of goods and services. Present value calculation can help investors estimate and compare values of different assets over a period of time. The current value formula is used across stock valuation, bond pricing, and even financial modelling since its estimations of the future returns enable investors to make informed decisions about investing. For the present value calculation, you are required to input details such as the future sum value you are aspiring to achieve, the time period you have (typically calculated in years), rate of interest, frequency of compounding, cash flow payments to be made, and the growth rate of annuities. 

Yearly Investment
Tenure
Yr
Interest Rate
%
Your Total Maturity Amount is
₹6,78,035
Maturity ₹6,78,035
Investment ₹3,75,000
Interest ₹3,03,035

 

Use of Present Value Calculator 

The present value calculator is helpful and almost essential for long-term investments. It lets you estimate the current value of assets and whether they will build up to the corpus. If the returns estimated fail to reach the amount you were hoping for, you could make an informed decision to invest in other instruments. Read on below. 

 

  • 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 that into the required field. 

  • Enter the number of years for the field marking the period of time.

  • You will be immediately shown the present value of the amount that you wish to make in the future. 

 

While you may now understand how a present value calculator can be used, it is also imperative to know the benefits of present value calculation. It is an essential tool for your investments, and knowing how it helps you is only the beginning of successful trading. So read on below to learn the benefits of present value calculation. 

 

  1. Ease of use:

    One of the benefits of using a present value calculator is the ease of using an online calculator. Previously, you had to make computations using the current value formula manually. However, that is no longer required owing to the abundance of present value calculators available online today.

  2. Choose the best annuity plans:

    Annuity plans are a boon, especially once you have retired and no longer draw a regular income. An annuity is a fixed monetary amount you will receive for the rest of your life. To achieve this, you can opt for annuity plans in advance and ensure you have a comfortable retirement. Using the present value calculator, you can choose the best annuity plans that align with your future requirements. If you are also saving up to meet other financial goals, such as your children’s weddings or higher education, you can opt for annuity plans that afford you enough cover to meet these expenses.

  3. Analyse investments better:

    You can analyse the investment cost better by performing a present value calculation. The price of an investment should ideally always be lower than the profitability of that investment. Since the profitability can only be determined at the time of maturity of that investment, it might be several years before you can accurately judge the investment’s profitability. However, a present value calculation is a reasonably accurate tool for estimating an asset’s future worth and profitability.

  4. Take measures to meet future goals:

    By calculating the present value of your future goals, such as your retirement plans, you will be able to assess how much money you are required to set aside for making investments for your future. Once you have ascertained the amount you require to live comfortably during retirement, you will immediately begin taking measures to meet those needs. For instance, you might reduce frivolous expenditure and concentrate on gathering funds to create a sizable retirement corpus.

  5. Invest without worrying about inflation:

    Inflation is one of the most significant considerations in economies. While a certain amount of inflation is considered healthy for an economy, it reduces the value of assets purchased today. The discount rate is usually calculated while performing the present value calculation, and it helps take inflation into account while calculating the longevity of the assets. As a result, the current value calculation is a good way to decipher your assets' future value without worrying about how inflation may negatively impact them.

Formula to Calculate Present Value

The present value formula is simple but might take a while to use manually. While using online current value calculators might save you some time, it is important to know the formula, understand the inputs you require, and ensure that you are entering the correct details. 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 present value is:

PV = FV/(1+i)n,

The future value (FV) is divided by a factor of 1+i for each completed period between the present and future.

 

The inputs you will require for performing the present value calculation include the following:

  1. FV or Future Value

    Future value refers to the sum you require in the future, which is something you can work out as per your personal requirements.

  2. t or Number of Time Periods

    This refers to the total time period you perform the present value calculation. It is best to keep your unit for periods constant, but it is typically calculated in years. If you wish to opt for annuity for perpetuity, you can enter p or perpetuity in the respective field.

  3. R or Rate of Interest

    The nominal interest rate is stated as a percentage.

  4. m or Compounding Frequency

    Compounding frequency refers to the number of times compounding occurs for an investment over a period. For example, you can enter one if you wish for compounding to happen once a year or annually. For example, enter 4 for quarterly compounding frequency, 12 for monthly compounding frequency, and 365 to ensure daily compounding on your investment. You can also enter c or continuous and opt for constant compounding frequency.

  5. PMT or Cash Flow Annuity Payments

    This refers to the cash flow annuity payments that must be made each period.

  6. G or Rate of Growth

    The growth rate experienced by annuity payments each year is entered as a percentage.

  7. q or the Number of Payments per Period

    This field pertains to the payment frequency. For example, for annual payments, enter 1, enter 4 for quarterly payments, 12 for monthly payments, and 365 for daily payments.

  8. T or the Frequency of Annuity Payments

    You can choose the frequency of annuity payments. For example, if you wish to get annuity payments at the end of the period, as is ordinary, you can enter the end in the related field. Alternatively, you can enter the beginning for annuity payments at the beginning of the period. 

How a Present Value Calculator Works

While the more straightforward present value formula has already been covered above, it is important to know the mathematical formula for the current value calculation. Read on below to learn what it is. 

 

PV = C/(1+r)^n

Of these,

PV = Present Value

C = Cash Flow in a Period

n = Number of Period

r = Rate of Returns

 

The present value is calculated based on the future value of the asset you are looking to achieve. For instance, if you require ₹1,00,000 in 5 years from now and expect to earn 8% from an investment while the number of periods would be five, it is imperative to calculate the present value of the investment. 

 

C = ₹1,00,000

n = 5

r = 8%

PV = 100000/(1+0.08)^5

Thus, PV = ₹68,058. 

 

By deriving this value from the present value calculation, you now know the amount you need to invest directly to avail of ₹1,00,000 in 5 years. 

Conclusion

Decisions relating to investments can often take a lot of time to find the best investments that align with your requirements but knowing the present value of an asset is one of the best ways to assess its future worth. In addition, understanding the current value will help ensure that your investments can cover your future expenses and requirements.