How To Use Present Value Calculator?
Imagine someone owes you Rs.10,000 and that person promises to pay you back after 4 years. If we calculate the present value of that future Rs.10,000 with an inflation rate of 8% using the present value calculator below, the result will be Rs.7,350.
Likewise assume you are expected to receive Rs.100,000/- 10 years from now. Present value calculator helps you in finding out the real worth of that Rs.100,000/- in today’s terms after adjusting the inflation during the tenure.
Money available in the future is less valuable than the same amount of money available now, so it has to be discounted by a factor to arrive at your money’s current value, which is called ‘Present Value’.
Let’s look at an example. Assume that you would like to put money in an account today to make sure your child has enough money in 12 years for his higher education.
If you would like to give your child Rs.500,000 in 12 years, and you know you can get 7.5% interest per year from a savings account during that time, how much should you put in the account now? The present value formula tells us:
PV = Rs.500,000/ (1 + 7.5%)^12 = Rs.2,09,927
Thus, Rs.2,09,927 will be worth Rs.500,000 in 12 years if you can earn 7.5% each year. In other words, the present value of Rs.500,000 in this scenario is Rs.2,09,927.
It is important to note that the three most influential components of present value are time, expected rate of return, and the size of the future cash flow.
To adjust for inflation in the calculation, investors can use the real interest rate (nominal interest rate – inflation rate).
In other words, money received in the future is not worth as much as an equal amount received today.
Money not spent today could be expected to lose value in the future by some implied annual rate, which could be inflation or the rate of return if the money was invested.
Now in order to use the present value calculator you need to enter:
- Money receivable in future
- Tenure or time period in years
- Average Rate of Inflation during the investment tenure
Check out yourself the value of your future money receivable in present terms using moneycontain present value calculator below in 3 steps.
What Is Present Value?
Present value also known as discounting is just opposite of compounding, like in compounding you calculate the future value of your total investments made on a monthly or yearly basis, in discounting we have to evaluate the value of money that we are expected to receive in the future in today’s terms.
Before we begin to understand the core concepts of present value I want to quote John Maynard Keynes, he said “The importance of money flows from it being a link between the present and the future”.
John Maynard was a British economist, whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments.
As an investor you should know the (TMV) “time value of money” the value of money does not remain the same across time. Meaning, the value of Rs.1000 today is not really Rs.1000, 2 years from now. Oppositely, the value of Rs.1000, 2 years from now is not really Rs.1000 as of today.
Whenever there is motion of time, there is an element of opportunity. Money has to be accounted or adjusted for that opportunity.
For e.g. Your father might have told told you that we used to get 1KG of mangoes in our time at only 5 rupees or may be even less than that. But if you go now to buy the same, this sound unrealistic, reason being with time there is inflation (interest).
That is why one should know, what will be the future investment he made for the retirement is sufficient enough to continue his life post retirement, if you calculate it in today’s term in respect to certain cost(interest) accounted.
Not only investors but big or small businesses use present value calculations for capital expenditures and routine business planning.
Being able to determine the present value of each potential investment, purchase, or cash flow before committing to it can help you and your company make the best possible decisions.
If, you have liked the content please do share it with your friends or on social media, as sharing do bring the good karma. If you have any questions or feedback you can leave them in comment box below.
If you are looking to buy a new home than you should see Moneycontain Home Loan EMI Calculator to better understand the monthly EMI installments as well as interest or property tax and lot more.
Note: Please do not take this as any recommendation, to trade or invest. This is just for reference, to make you understand more about the present value calculator, present value and its importance, under no circumstances intended to be used or considered as financial or investment advice, a recommendation or an offer to sell, or a solicitation of any offer to buy any securities or other form of financial asset.
Please do your own research and make investment. Moneycontain will not be responsible for any of your losses at all. The point made is for educational purpose only. All investments are subject to risks, which should be considered prior to making any investments.