How to Calculate the Present Value of Costs

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Present value of cash flows determines what future money is worth today.
Present value of cash flows determines what future money is worth today. (Image: Jupiterimages/BananaStock/Getty Images)

If you have several costs that are in the future, you can find the present value of these costs. The present value of the costs are how much the costs are worth today. Present value of costs takes into account a concept known as time value of money. This concept states that money today is better than money tomorrow because you can invest the money today to get a better return. This is why people want money sooner rather than later.

Determine the costs and when you will incur the costs. For example, assume in two months you owe $400 and in four months you owe $600.

Determine the interest rate you can get at a bank. This can be a guess, but a general estimate is good. In the example, assume the interest rate is 4 percent per month.

Determine the present value factor for each period and the interest rate. A present value table is available in the references. In the example, two periods at 4 percent is 0.9246 and four periods at 4 percent is 0.8548.

Multiply the cost by its corresponding cash flow. In the example, $400 times 0.9246 equals $396.84 and $600 times 0.8548 equals $512.88.

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