What is the Present Value?
Present value answers: what is a future sum worth today? Money available now can be invested, so a payment years away must be discounted to reflect that lost opportunity.
It underpins almost all financial decision-making — valuing pensions, comparing a lump sum against an annuity, appraising a project, or judging a lottery payout option.
Formula & worked example
For a stream: PV = Σ payment / (1 + r)year
Worked example: 500,000 receivable in 15 years, discounted at 7%, is worth 181,240 today — a discount of 63.8%. That is why a lump sum offer today is often better than a much larger promised future payment.
How to use this present value calculator
- Enter the future amount you expect to receive.
- Choose a discount rate — typically the return you could otherwise earn.
- Set the number of years until you receive it.
- For an annual stream, enter the yearly payment as well.
Smart tips
- The discount rate should reflect your realistic alternative return, plus a premium for risk and uncertainty.
- Higher discount rates shrink present value dramatically — at 10% over 20 years, a future sum is worth only 15% of face value.
- Use present value to compare a pension lump sum against a lifetime income offer.
- For inflation-only adjustments, use the inflation rate as the discount rate.
- Present value is the foundation of net present value, the standard tool for appraising investments.
Frequently asked questions
What is present value?
The value today of money to be received in the future, discounted to reflect the return you could earn in the meantime.
What discount rate should I use?
Typically your realistic alternative return — 5–8% for general purposes, higher for risky cash flows, or the inflation rate if adjusting for purchasing power only.
Why is future money worth less?
Because money today can be invested and grow. Waiting means forgoing that return, plus bearing inflation and uncertainty.
How is present value used?
To compare lump sums against income streams, value pensions and annuities, appraise projects, and decide between payout options.
Want the theory behind the numbers? Read our finance basics on the Money Blog.