Present value formula
To calculate the present value of future incomes you should use this equation:
- PV = present value
- FV = future value
- r = interest rate
Thanks to this formula you can estimate the present value of an income to be received in one year. If you want to calculate the present value for more than one period of time, you need to raise the
(1+r) by the number of periods. Then the equation will look like this:
Where: n = number of periods.
This is the most commonly used present valuation model where compound interest is applied, which means that interest increases exponentially over subsequent periods.
How to calculate present value
If you read the previous paragraph you already know that to estimate present value you need to:
- Determine the future value. In our example let’s make it
- Determine a periodic rate of interest. Let’s say
- Determine the number of periods. Let’s make it
- Divide the future value by
(1+rate of interest)^periods
In our example it will look like this:
100$/(1+0.08)2 = 85,73$
Now you know how to estimate the present value of you’re future incomes on your own or you can simply use our present value calculator.
Other important present value calculations
Present value calculations are tied closely with other formulas, such as present value of annuity. Annuity denotes a series of equal payments or receipts, which we have to pay at even intervals, for example rental payments or loans. Than the equation would be different. Click through to our present value of annuity calculator to learn more.