What present value means
Present value answers the opposite question to future value: what is money you will receive in the future worth today? Because money can earn interest over time, a payment due years from now is worth less than the same amount in your hand right now. Present value puts a precise figure on that gap.
The present value formula
PV = FV / (1 + r/n) raised to the power of n x t, where FV is the future amount, r is the annual discount rate, n is how many times a year it compounds, and t is the number of years.
Worked example
You are promised 2,000 in 10 years, and money could otherwise earn 8% a year. The present value is about 926, so that future 2,000 is worth only around 926 to you today. The 1,074 difference is the value lost to time.
Why it matters
Present value is how you compare offers that pay out at different times: a lump sum now versus instalments, or a settlement today versus later. It is the same tool investors use to decide what a future cash flow is worth paying for now.
Frequently asked questions
What is present value?
The value today of a sum you will receive in the future, discounted for the interest that money could otherwise have earned.
What discount rate should I use?
Use the return you could realistically earn elsewhere, or the interest rate relevant to the decision. A higher rate makes the future sum worth less today.
How does it relate to future value?
They are inverses. Future value grows money forward in time; present value discounts it back. Enter the same rate and years and they reverse each other.