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How It Works
Present worth analysis converts future cash flows into today's dollars using a discount rate. It answers the question: “What is a future payment worth right now?” This is the foundation of investment analysis, bond pricing, and capital budgeting.
The calculator supports three modes: single-payment present/future value, annuity present value (series of equal payments), and annuity future value (savings accumulation).
Example Problem
You will receive $50,000 in 5 years. At a 6% discount rate, what is it worth today?
- PV = $50,000 / (1 + 0.06)5
- PV = $50,000 / 1.3382 = $37,363
If instead you receive $10,000 per year for 5 years at 6%, the annuity PV is $10,000 × 4.2124 = $42,124.
Frequently Asked Questions
What discount rate should I use for present value?
Use your required rate of return or cost of capital. For personal investments, this might be 6–8%. For corporate projects, use the weighted average cost of capital (WACC). Higher discount rates reduce present value.
What is net present value (NPV)?
NPV is the present value of all cash inflows minus the initial investment. An NPV greater than zero means the project earns more than the discount rate. A $100,000 project with $120,000 in PV of cash flows has an NPV of $20,000.
How is present value used in real estate?
Real estate investors discount future rental income and resale proceeds to determine what a property is worth today. If 10 years of $50,000 NOI discounts to $368,000 and the resale discounts to $500,000, the property is worth $868,000.
Related Calculators
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- Profitability Index Calculator — rank investment opportunities.
- Interest Rate Calculator — simple and compound interest.
- Rule of 72 Calculator — quickly estimate doubling time for investments.
- Depreciation Calculator — account for asset depreciation in project analysis.
Reference: Newnan, D.G., Eschenbach, T.G., & Lavelle, J.P. Engineering Economic Analysis. Oxford University Press.