Present Value Explained: What Future Money Is Worth Today
Learn how present value and discounting work, the formulas for a lump sum and regular payments, and how to choose a discount rate, with a free calculator.
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Free tool: Present Value CalculatorA dollar today is worth more than a dollar next year, because today's dollar can be invested and earn interest in the meantime. Present value turns future amounts into today's money, so you can compare a payment later with cash now, judge an investment, or decide between a lump sum and installments. This guide explains discounting, the formulas and how to use the free Present Value Calculator.
The present value of a lump sum
PV = FV ÷ (1 + r ÷ n)^(n × t)
where FV is the future amount, r the annual discount rate, n the compounding periods per year and t the years.
Example: you'll receive $50,000 in 10 years, and you could earn 7% a year elsewhere:
PV = 50,000 ÷ 1.07^10 = $25,417.46
So $50,000 in ten years is worth about $25,400 today, and the "discount" for waiting is $24,582.54. Put the other way, $25,417.46 invested at 7% would grow to $50,000 in ten years.
The discount rate changes everything
The rate you use says what else you could do with the money. The higher it is, the less future money is worth today:
| Discount rate | Present value of $50,000 in 10 years |
|---|---|
| 3% | $37,204.70 |
| 5% | $30,695.66 |
| 7% | $25,417.46 |
Choose a rate that reflects your alternative: a savings rate for safe money, an expected investment return, or a business's cost of capital. Riskier future payments deserve a higher rate.
Present value of regular payments
For a series of equal yearly payments, the present value is:
PV = PMT × (1 − (1 + r)^−t) ÷ r
Example: $5,000 a year for 10 years, discounted at 7%:
- Paid at the end of each year: $35,117.91
- Paid at the start of each year: $37,576.16
The payments total $50,000, but they're worth about $35,000 today, because most of them arrive years from now.
Practical uses
- Lump sum or installments? Compare the present value of the installments with the lump sum on offer.
- Investments: a project or bond is worth buying if the present value of its future cash exceeds its price; the NPV Calculator applies this to a series of cash flows.
- Saving for a goal: the present value of a future cost is what you'd need to set aside today.
- Settlements, lottery payouts and pensions, which often offer a choice between a lump sum and payments.
How to use the Present Value Calculator
- Open the Present Value Calculator.
- Enter the future value or lump sum you'll receive.
- Add an annual payment if there's also a yearly payment (leave it at 0 otherwise).
- Enter the annual discount rate and the time period in years.
- Choose the compounding frequency and the payment timing: end or beginning of each period.
- Read the results: the present value, the total future cash flows, the total discount and the discount as a share of the future cash, with charts and a year-by-year table.
Frequently asked questions
What is present value?
Today's value of money you'll receive in the future, after allowing for the return you could earn in the meantime. At 7%, $50,000 in 10 years is worth $25,417.46 today.
What is a discount rate?
The rate used to convert future money into today's money. It represents the return you could earn elsewhere, plus extra for risk; higher discount rates give lower present values.
How is present value different from future value?
They're the same calculation in opposite directions: future value grows money forward in time, present value discounts it back. The Future Value Calculator works forward.