Present Value (PV)

Let’s suppose you want to determine the current value of the ultimate earnings on an investment. This question could be restated in the following manner: What is the present value of my investment that will mature in n years at i percent interest (or discount rate)?

To solve this problem, you will need to know the future value of your investment, how many years are required for the investment to reach maturity, and what interest or discount rate your investment has. The result of the equation will be a dollar amount that is smaller than the future amount of principal and interest that you will have earned; it is the amount that the investment is worth at the present time.

The present value (PV) equation is as follows:

PV = future value/ (1 + interest rate)ⁿ

In this equation, n is the number of periods (years in this case).

The key inputs in the PV equation are as follows:

FV = the future value of the investment at the end of n years

N = the number of years in the future

I = the interest rate, or the annual interest rate or discount rate

PV = the present value, in today’s dollars, of a sum of money that you have invested or plan to invest

After you find these inputs, you can solve for the present value (PV).

You must remember that money you will earn in the future is less valuable than money you have right now; this is because you cannot use future money to earn interest today. You can only earn interest with money you have in hand.