Present Value
Present Value
Money in the future is worth less today; discounting converts a future amount into its equivalent present value.
The present value is PV = FV/(1 + r)^n. where FV is the future value, r the discount rate and n the number of periods.
Inputs
FV := 10000=10000
r := 0.06=0.06
n := 5=5
Discount the future value back to today.
PV := FV/(1 + r)^n=7472.58
Results
A higher discount rate or longer horizon shrinks the present value. This is the basis of investment appraisal and life-cycle costing.
Assumptions & limitations
- Constant discount rate.
- Single future cash flow.
- Discrete annual periods.