Would you prefer receiving $10,000 today or wait a year to receive $10,000?
This is not a trick question, and hopefully, for at least the sake of illustration, you would rather receive $10,000 today rather than wait a year.
But what if, I offered you $9,000 today or $10,000 in a year. How do you know which opportunity you should pursue?
That's the point of a present value calculator - it will calculate today's value of a future amount that you can then use to decide whether to accept (or offer) the value as of today or to wait and accept (or offer) the future value amount.
How does the calculator calculate the present value (PV)?
The key to understanding the PV calculation is to realize that there is no "right" present value amount; there is only an "accurate" present value.
PV and Discount Rate
The present value, also known as the present discounted value uses an input known as the "discount rate." We express the discount rate as a percentage, and it is used to calculate the PV. And while the calculation is exact (a change of one day changes the calculated result), the present value itself is a personal number.
Why is that?
It boils down to understanding the discount rate. You should select a discount rate equal to what you would expect to earn if you invested the money. How you invest the money is up to you. You might choose 10-year treasuries, currently earning about 2.5% a year or you might select real estate, and then you might assume a rate-of-return exceeding 10%.
In any event, the rate-of-return you earn on your investments is the value you should use for the discount rate.
If you would like to test the PV result for accuracy, you can use this future value calculator. Enter the calculated present value, the discount rate as the annual interest rate, and set the other options to match how you set this calculator. The calculated future value will match the future value you entered here.
The FV result confirms the accuracy of the present value calculation, and it should, in turn, give you confidence that if you accept a present value settlement that you'll achieve the expected future value result at your assumed rate-of-return.
As you can see, this calculator gives the user the ability to enter a PV date (Today's Date) and an FV date. Notice that a change by one day changes the result.
I don't need to use any weasel words like "estimate" like you might find some sites using. This calculator is perfectly suitable to use for arranging a legal settlement imposed by a court, or for any other business or investment need.
If you are calculating the PV for a contract that is settling later, (i.e. not "today") you should enter for the PV date, the date the agreement closes.
In addition to the calculator being very accurate, it also supports 13 compounding frequencies. If your discount rate assumes a particularly compounding frequency, then you'll want to pick from the below list the one that matches.
- Compounded Continuous
- Twice Monthly
- Every 4 Weeks
- Every 4 Months
Questions? Comment? How can I make this calculator (and page) more useful?
Please leave your remarks below.
Present value is the opposite of future value (FV). Given $1,000 today, it will be worth $1,000 plus the return on investment a year from today. That's future value.
If you are schedule to receive $10,0000 a year from today, what is its value today, assuming a 5.5% annual discount rate? The "annual discount rate" is the rate of return that you expect to receive on your investments. This is a personal number. There is no "right" answer, though you want to use a realistic number based on your investment history. The discount rate will vary from individual to individual.
Enter $10,000 as the future value (never type the currency symbol or commas), set the start date and end date for one year's duration and set the discount rate to 5.5%. Assume monthly compounding and a 365 day year.
The PV is $9,466.04. You could accept $9,466.04 today in lieu of $10,000 in a year. The two amounts are equal.
Date Math: If you change either date, the number of days between the two dates will be calculated. If you enter a positive number of days, the future value date will be updated. If you enter a negative number of days the present value date will be updated.