Formula to Calculate Present Value (PV)
PV = C / (1 + r) n You are free to use this image on your website, templates, etc., Please provide us with an attribution
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For a series of future cash flows with multiple timelines, the PV formula can be expressed as, PV = C1 / (1 + r) n1 + C2 / (1 + r) n2+ C3 / (1 + r) n3 + ……. + Ck / (1 + r) nk Calculation of Present Value (Step by Step)The calculation of the PV Formula can be done by using the following steps:
ExamplesExample #1Let us take the example of John who is expected to receive $1,000 after 4 years. Determine the present value of the sum today if the discount rate is 5%. Given,
Therefore, the present value of the sum can be calculated as, PV = C / (1 + r) n = $1,000 / (1 + 5%) 4 PV = $822.70 ~ $823 Example #2Let us take another example of a project having a life of 5 years with the following cash flow. Determine the present value of all the cash flows if the relevant discount rate is 6%.
Given, Discount rate, r = 6% Cash flow, C1 = $400 No. of period, n1 = 1 Cash flow, C2 = $500 No. of period, n2 = 2 Cash flow, C3 = $300 No. of period, n3 = 3 Cash flow, C4 = $600 No. of period, n4 = 4 Cash flow, C5 = $200 No. of period, n5 = 5 Therefore, calculation of present valuePresent Value (PV) is the today's value of money you expect to get from future income. It is computed as the sum of future investment returns discounted at a certain rate of return expectation.read more of cash flow of year 1 can be done as, PV of cash flow of year 1, PV1 = C1 / (1 + r) n1 = $400 / (1 + 6%)1 PV of cash flow of year 1 will be – PV of cash flow of year 1 = $377.36 Similarly, we can calculate PV of cash flow of year 2 to 5
= $500 / (1 + 6%)2 = $445.00
= $300 / (1 + 6%)3 = $251.89
= $600 / (1 + 6%)4 = $475.26
= $200 / (1 + 6%)5 = $149.45 Therefore, the calculation of present value of the project cash flows is as follows, PV = $377.36 + $445.00 + $251.89 + $475.26 + $149.45 PV = $1,698.95 ~ $1,699 Relevance and UsesThe entire concept of the time value of moneyThe Time Value of Money (TVM) principle states that money received in the present is of higher worth than money received in the future because money received now can be invested and used to generate cash flows to the enterprise in the future in the form of interest or from future investment appreciation and reinvestment.read more revolves around the same theory. Another exciting aspect is the fact that the present value and the discount rate are reciprocal to each other, such that an increase in discount rate results in the lower present value of the future cash flows. Therefore, it is important to determine the discount rate appropriately as it is the key to a correct valuation of the future cash flows. Recommended ArticlesThis has been a guide to the Present Value Formula. Here we discuss the calculation of the present value using its formula along with examples and a downloadable excel template. You can learn more about financial analysis from the following articles –
What is the present value of the cash flow at the end?Present value is the current value of a future cash flow. Longer the time period till the future amount is received, lower the present value. Higher the discount rate, lower the present value.
What is the present value of a cash inflow of 1250 four years from now if the required rate of return is 8% rounded to 2 decimal places )?So in the denominator we have 1 plus the rate interest which is 0.08 and that elevated to the 4 in the numerator, we have the future value. That is 1250 point. So using our calculator remember that we need to answer with 2 decimal places, so that will be 918.79.
What is the present value of a cash inflow of $2000 five years from now if the required rate of return is 6 %?The amount to be received after five years is $2600.
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