what is present value 
present value pv is the current value of a future sum of money or stream of cash flows it is determined by discounting the future value by the estimated rate of return that the money could earn if invested present value calculations can be useful in investing and in strategic planning for businesses katie kerpel investopediaunderstanding present valuepresent value is based on the concept that a particular sum of money today is likely to be worth more than the same amount in the future also known as the time value of money conversely a particular sum to be received in the future will not be worth as much as that same sum today for example 1 000 today should be worth more than 1 000 five years from now because today s 1 000 can be invested for those five years and earn a return if let s say the 1 000 earns 5 a year compounded annually it will be worth about 1 276 in five years 1present value looks at it in reverse for example if you are due to receive 1 000 five years from now the future value fv what is that worth to you today using the same 5 interest rate compounded annually the answer is about 784 2 in this formulation the rate of return is known as the discount rate the word discount refers to future value being discounted back to present value present value formula and calculationthis is how to calculate the present value of a future sum of money present value fv 1 r n where fv future value r rate of return n number of periods begin aligned text present value dfrac text fv 1 r n textbf where text fv text future value r text rate of return n text number of periods end aligned present value 1 r nfv where fv future valuer rate of returnn number of periods to calculate the present value of a stream of future cash flows you would repeat the formula for each cash flow and then total them fortunately you can easily do this using software or an online calculator rather than by hand determining the discount ratea mentioned the discount rate is the rate of return you use in the present value calculation it represents your forgone rate of return if you chose to accept an amount in the future vs the same amount today the discount rate is highly subjective because it s simply the rate of return you might expect to receive if you invested today s dollars for a period of time which can only be estimated in many cases investors will use a risk free rate of return as the discount rate that is often the rate on u s treasury bonds which are considered virtually risk free because they are backed by the u s government 3the higher the discount rate you select the lower the present value will be because you are assuming that you would be able to earn a higher return on the money benefits of present valuelimitations of present valueyou can also incorporate the potential effects of inflation into the present value formula by using what s known as the real interest rate rather than the nominal interest rate example of present valueas a simple example let s say you have the choice of being paid 2 000 today or 2 200 one year from now you expect that you could safely invest the 2 000 and earn 3 on it which is the better option in this case 2 200 is the future value fv so the formula for present value pv would be 2 200 1 0 03 1 the result is 2 135 92 so if you were to be paid now you d need to receive at least 2 135 92 not just 2 000 to come out even calculating future value vs present valuein the present value formula shown above we re assuming that you know the future value and are solving for present value it is also possible to solve for future value when you know the present value using a formula like this fv pv x 1 r n so plugging in the same numbers as in the example above fv 2 000 1 03 2 060 as both the present value and future value calculations show you d be better off waiting for the 2 200 a year from now than taking 2 000 now of course both calculations also hinge on whether the rate of return you chose is accurate 