How to find Present Value (PV)

A present value calculation is easy once you've gathered the numbers.

Present value is a term used in business and finance circles that describes how valuable today's money would be in the future. Because you can invest today's dollar and wait for a positive return -- a process called "compounding" -- that dollar is more valuable today than in the future. To calculate present value you have to know how large and risky the cash flow is, and how long you have to wait to receive the cash.

Things You'll Need

• Calculator

Instructions

1. Determine the size of the pool of cash you expect to receive. This called the "Future Cash Flow." As an example, you expect to receive $500.

2. Ask the investors the amount of return they require. This figure is a percentage and it is called the "Required Rate of Return." As an example, your investors require a 15% return.

3. Find out how long you have to wait to receive the cash. This figure should be in years. As an example, you have to wait 3 years before you have cash in your hand.

4. Plug the figures from Steps 1, 2 and 3 into the following formula: Present Value = Future Cash Flow / (1 + Required Rate of Return) -- to the power of -- Number of years you have to wait. In the example, your present value formula would look like this: Present Value = $500 / (1 + .15) -- to the power of -- 3. 131.50

5. Solve for present value. In the example, the present value of your $500 future cash flow would be $131.50.

References

• Expectations Investing: How Do We Calculate Present Value?
• Finance Professor: Present Value
• Calculator Soup: Present Value Calculator

Resources

• Read this Article in Spanish