How to Calculate Current Value
Calculating the current value, or present value, of an asset requires making assumptions about its future value, the duration you'll hold the asset, and future interest rates. It also requires a little math.
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Instructions
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1
Determine the duration that you'll hold the asset. Some assets come with this timing predefined, such as a certificate of deposit. For other assets, like an investment property, you need to make an assumption of how long you'll hold it.
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2
Estimate the best interest rate available to you for each year between now and the time when you'll cease holding the asset. The best interest rate for one person is different for that of another. For example, if you have a million dollars available to invest for several years, you will have investments available to you at better rates than someone with only $1,000 to invest over a short term. Note that this is as much an art as a science as nobody can perfectly predict future rates.
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3
Estimate the final value of the asset at the time you sell it.
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4
Calculate the current value for the sale of the asset using your best interest rates. For example, if you sell an asset for $100 three years from now, and your best interest rates are 3%, 4% and 5% for each of the next three years, then the value of your asset two years from now = $100 / (1+.05) = $95.238. Its value one year from now will be $95.238 / (1+.04) = $91.575. Its current value is then $91.575 / (1 + .03) = $88.91.
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5
Replicate the current value calculation of step 4 for cash flows you expect between now and the sale of the asset. For example, if you had a dividend payment of $5 at the end of the second year, and your interest rates for the next two years are 3% and 4%, the dividend will have a current value of ($5 / (1 + .04))/(1 + .03) = $4.67. Do this for expenses, too.
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6
Add current value of the sale of the asset and all interim cash flows. Subtract the original cost of the asset. The remainder is the current value of the asset.
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7
Simplify your calculation for constant interest rates. If you assume, for example, a 5% interest rate for all years, then you can calculate the current value of selling that asset for $100 five years from now as $100 / (1 + .05)^5 = $78.35
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