The ability to calculate the present value (PV) of a future cash flow stream or a sum of money is vital not only to buying and to selling assets, but also in monitoring efficiency and progress of capital assets within a company.
When you invest in a product – like a machine – you may have an idea of the value that it will bring to your firm as well as a projection on the return on investment you’ll get from it; however, you cannot relax and assume that your ideas are right.
Monitoring the actual amount of value the machine generates within a specified period is the best way to establish how accurate your estimate and projections were, and make adjustments accordingly. This is especially true if you are purchasing used capital, planning to sell that capital or if you deal with other kinds of investments, like derivatives and bonds.
This leads us to the question, how do you calculate the present value of an investment?
Using the present value calculator
The PV calculator offers a simple and straightforward way of estimating the current worth of a future asset. All you need to do is provide the following:
Future Value (FV), which is the amount that you either will get or would like to get at the end of a certain period
Interest Rate per Year, which is the return rate per year that you can earn on the money today, throughout the whole period of your investment
Number of years, which is the number of years until the budgeted amount is obtained – you can input in fractional years, like 5.2 and so on.
Once you enter all these requirements, you can then press, “calculate” to get the present value and the total interest received over the period.
Using the present value formula
At the most basic, let’s say you are a great investor and can receive a 10% ROI in the ‘market’. You’ve got $100 PV and stay in the market for 3 years:
1st year: $110
2nd year: $120
3rd year: $133.1
The solution comes in this formula
C is the future sum
I is the interest rate
1 is 100%
n Is the number of periods
So, $133.10 in 3 years given 10% investment returns
PV=$133.10/ (1+.1) ^3
Another way of looking at PV is that with more interest you pay or earn on future money, either by way of long-term holdings or higher interest, the less the PV will be. For higher interest, the PV will rise at a faster rate over time, whereas the longer-term holdings will rise at a similar rate but will take longer to mature.
Both formulas can help you estimate the present value for your future investment. However, using the PV calculator offers you an easy and straightforward way to calculate the value. It removes any errors or guesswork from the process and helps you get accurate results within the shortest time possible.