Present value
Also called PV
What a future amount of money is worth in today’s dollars, given a rate of return or discount rate.
What it means
Present value works backward from a future sum to figure out how much it is worth now. You discount the future amount using a rate that reflects what money could earn, along with risk and inflation. The higher the rate or the longer the wait, the lower the present value.
Present value lets you compare amounts that arrive at different times on equal footing. It is used to value bonds, pensions, lawsuit settlements and lottery payouts, and to decide how much to invest today to reach a future goal.
Formula
PV = FV ÷ (1 + r)^n
- PV = present value
- FV = future amount
- r = discount rate per period
- n = number of periods
Example
Suppose you will receive $10,000 in 5 years and money can earn 6% a year. Its present value is $10,000 ÷ 1.06^5, or about $7,473. Equivalently, investing $7,473 today at 6% would grow to about $10,000 in 5 years.
How it’s used
- Comparing a lump-sum offer with future payments
- Figuring how much to set aside today for a future expense
- Valuing bonds and other investments
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.