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Present Value

Decision Rule

❶Net present value calculations take the following two inputs: If you have a monthly payment, multiply by 12, or multiply a quarterly payment by 4, and so on.

Present Value Formula   The only other necessary items are a few important formulas and items of information. Present value calculations are a way to take an amount of money or a series of payments which are due to you in the future, and determine how much money that income is worth today.

For a pension plan, two main steps are involved: First, you'll calculate the total value of the pension plan at the time it will begin, which is your retirement age. Then you'll discount that amount of money to the present. To calculate the value of the pension at the time you retire, determine with the annualized payments the pension sends.

If you have the yearly payment, that's all you need. If you have a monthly payment, multiply by 12, or multiply a quarterly payment by 4, and so on. We'll call this number PMT, which is short for "payment. For example, if you plan to retire at 65 and you estimate that you'll live to about 80, use Present Value Calculator Instructions: Enter the future lump sum you would like to calculate present value for.

Next, select either "Months" or "Years" and enter the corresponding number of periods to calculate present value for. Next, enter the present value discount rate compounding interest rate and select the compounding interval, then click the "Calculate Present Value of Money" button.

Mouse over the blue question marks for a further explanation of each entry field. More in-depth explanations can be found in the glossary of terms located beneath the Present Value Calculator. Watch the Video Tour to see what you're missing! JavaScript is turned off. You will need to enable it to use this javascript-based calculator.

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This field should already be filled in if you are using a newer web browser with javascript turned on. If the calculator is not working for you, this information will help me to find and fix the problem. Present Value Calculator Glossary of Terms. Enter the dollar amount of a future lump sum of money you wish to calculate present value for. In other words, how much would you like to have saved up by a certain point of time in the future?

Periods to calculate present value for: Select either Months or Years and enter the corresponding number of periods. Present value discount rate: Enter the present value discount rate compounding interest rate present amount will grow at to be used in the PV calculations.

Please enter as a percentage for. Select the discounting frequency you want the present value calculator to use for the PV calculations.

Therefore, NPV is the sum of all terms,. The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash flows are not equal in amount, then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose, nevertheless the usual initial investments during the first year R 0 are summed up a negative cash flow.

The rate used to discount future cash flows to the present value is a key variable of this process. A firm's weighted average cost of capital after tax is often used, but many people believe that it is appropriate to use higher discount rates to adjust for risk, opportunity cost, or other factors.

A variable discount rate with higher rates applied to cash flows occurring further along the time span might be used to reflect the yield curve premium for long-term debt. Another approach to choosing the discount rate factor is to decide the rate which the capital needed for the project could return if invested in an alternative venture.

Related to this concept is to use the firm's reinvestment rate. Re-investment rate can be defined as the rate of return for the firm's investments on average.

When analyzing projects in a capital constrained environment, it may be appropriate to use the reinvestment rate rather than the firm's weighted average cost of capital as the discount factor. It reflects opportunity cost of investment, rather than the possibly lower cost of capital. An NPV calculated using variable discount rates if they are known for the duration of the investment may better reflect the situation than one calculated from a constant discount rate for the entire investment duration.

Refer to the tutorial article written by Samuel Baker  for more detailed relationship between the NPV value and the discount rate. For some professional investors, their investment funds are committed to target a specified rate of return.

In such cases, that rate of return should be selected as the discount rate for the NPV calculation. In this way, a direct comparison can be made between the profitability of the project and the desired rate of return. To some extent, the selection of the discount rate is dependent on the use to which it will be put. If the intent is simply to determine whether a project will add value to the company, using the firm's weighted average cost of capital may be appropriate.

If trying to decide between alternative investments in order to maximize the value of the firm, the corporate reinvestment rate would probably be a better choice. Using variable rates over time, or discounting "guaranteed" cash flows differently from "at risk" cash flows, may be a superior methodology but is seldom used in practice. Using the discount rate to adjust for risk is often difficult to do in practice especially internationally and is difficult to do well. An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using rNPV or a similar method, then discount at the firm's rate.

NPV is an indicator of how much value an investment or project adds to the firm. Appropriately risked projects with a positive NPV could be accepted.

This does not necessarily mean that they should be undertaken since NPV at the cost of capital may not account for opportunity cost , i. In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.

A positive net present value indicates that the projected earnings generated by a project or investment in present dollars exceeds the anticipated costs also in present dollars. Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

From this follow simplifications known from cybernetics , control theory and system dynamics. Imaginary parts of the complex number s describe the oscillating behaviour compare with the pork cycle , cobweb theorem , and phase shift between commodity price and supply offer whereas real parts are responsible for representing the effect of compound interest compare with damping.

A corporation must decide whether to introduce a new product line. Main Topics

Equity is the value of an asset less the value of all liabilities on that asset.

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To calculate the present value of receiving \$1, at the end of 20 years with a 10% interest rate, insert the factor into the formula: We see that the present value of receiving \$1, in 20 years is the equivalent of receiving approximately \$ today, if the time value of money is .