Present value, or PV, is the current value of a future sum of money or investment returns. It is used to represent that the current value of a certain amount of savings or investments will be more than its value in the future.
During calculations, the present value accounts for the rate at which future cash flows will be discounted. This discount occurs when inflation decreases the funds’ values by inflating the number of goods and services. Hence, calculating the present value can help you estimate the possible trajectory of your investments and assets over time.
How Is the Present Value Calculated?
So, how is the present value calculated? Let’s get into its manual calculation to understand that. The formula to calculate the present value of your future assets and investments is given below:
PV = C / (1 + r)^n
PV = Present Value
C = Cash Flow in a particular period
n = Number of periods
r = Returns
So, let’s assume that you expect to earn ₹1,00,000 in 5 years time. Your expected return rate is 8%, while the investment period is 5 years.
Hence, C = ₹1,00,000
r = 8%
n = 5
Therefore, the calculation will look like this.
PV = 100000 / (1 + 8) ^5
PV = ₹68,058
Here’s every factor that affects the present value calculation given above.
- Future Value: Also referred to as the cash flow during a particular period, the future value is the sum you expect to earn in the future or the sum you may require.
- Number of Time Periods: This is usually calculated in years. It is the time period for which you perform the present value calculation for.
- Rate of Interest: This is the rate of interest you expect to earn a few years into the future.
- Compounding Frequency: This refers to the number of times compounding of the deposit amount as per the interest rate occurs during a given period. This is a lot like a non-cumulative FD investment payout.
- PMT or Cash Flow Annuity Payments: This refers to the number of cash flow annuity payments that are to be made under each period.
- Rate of Growth: The growth percentage experienced by each annuity payment every year.
How Does the Online Present Value Calculator Work?
The manual calculation might not look like a lot. However, what if you could derive the same present value effortlessly in the matter of seconds? You can do so with an online present value calculator.
Step 1: Start with entering the investment amount into the calculator
Step 2: Enter the expected rate of interest
Step 3: Choose the number of periods
Step 4: The present value should be displayed on your screen
For example, if you enter your future return or money as ₹60,000, your expected rate of interest as 5.3%, and the number of periods or years as 5 years. This means that the present value would be approximately ₹46,346.
Benefits of Using the Online Present Value Calculator?
Here’s why you should be using the online present value calculator instead of manually carrying out such calculations.
- You can do away with manual calculations and use an online calculator to easily compute a present value of your future sum of money
- Through such calculations, you can get a clearer idea of which long-term investment is the best for your financial future
- You can carefully create a reliable and sturdy plan for your further future like your retirement or your child’s education
- By calculating the present value of your future sum of money, you can fully let go of any inflation-related worries
It is always a great decision to be prepared for all the ups and downs of the economy. In this way, you can be fully prepared to make the right financial decisions. Your financial strategies, your financial expectations and your financial future will all be aligned through a little preparation.
An online present value calculator can help you do so effectively. It can derive approximate values within seconds and the estimates can contribute to your financial planning in a guaranteed way. Comparison and analysis becomes very easy through tools like a present value calculator and fixed deposit interest rates calculator and you can plan your retirement or your child’s dream school fees in a foolproof manner.