Investment
What is present value and discounting?
Present value converts a known future amount into its equivalent value today at a chosen discount rate.
Definition
Present value converts a known future amount into its equivalent value today at a chosen discount rate.
Intuition
The longer the wait or the higher the discount rate, the less the future amount is usually worth now.
Formula
Present value is one future amount divided by its compound discount factor.
Formula variables
PV is value today; FV is one future payment; r is the nominal annual discount rate; m is compounding periods per year; t is years. There are m × t periods at r ÷ m per period.
When to use it
Use it to compare a single future payment with money today, such as a maturity payment or savings target. For multiple inflows and outflows, discount each period and use NPV.
Example
- Enter future value 121,000, a 10% annual discount rate, two years, and annual compounding.
- The discount factor is (1 + 10%)² = 1.21; divide 121,000 by 1.21.
- Present value is 100,000 and the discount amount is 21,000 at the chosen rate.
Common mistakes
Do not treat the discount amount as a fee or an assumed discount rate as a guaranteed market return.
Frequently asked questions
Why is future money usually worth less today?
Money available now can be invested or used elsewhere; the discount rate represents waiting and opportunity cost.
How should I choose a discount rate?
Choose it for the decision, opportunity cost, and risk. The result depends on that assumption; no one rate fits every case.
Can this page value several dated cash flows?
This tool discounts one future amount. Use NPV for a series of cash flows at different times.