The formula
How to calculate present value
Present value answers what a future payment is worth right now. Money arriving in ten years is worth less than the same amount today, because today's money could be invested in the meantime — discounting puts a price on that wait.
The discount rate is the opportunity cost: the return available on an alternative of similar risk. A higher rate means waiting costs more, so the present value falls.
Here is what each field means:
- Amount in the future
- Discount rate (%) — the return you could earn elsewhere on comparable risk
- Years away (years)
The result updates on every keystroke. The URL updates too, which makes the filled-in version easy to bookmark or send to someone else.
Worked example
Here is the calculation with the starting values:
- Amount in the future: 50,000
- Discount rate: 6 %
- Years away: 10 years
That gives:
- Present value: 27,919.74
- Amount discounted away: 22,080.26
- Discount factor: 0.56
Reading the result
The discount factor is worth reading on its own. At 6% over ten years it is about 0.56, meaning a pound promised in a decade is worth 56p now. That single number explains why lump-sum offers on pensions and settlements look smaller than the total they replace.
Where this goes wrong. Choosing the discount rate carelessly. It drives the whole answer — 4% versus 8% over twenty years changes the present value by more than half — so state the rate alongside any result you quote.
Use what the money could realistically earn at similar risk. For a guaranteed government-backed payment, a gilt yield is defensible; for a business cash flow, a rate reflecting the risk of it not arriving at all.
No. Present value discounts a single future amount. NPV discounts a whole series of cash flows, including the money paid out at the start, and is the version used to judge whether a project is worth doing.
The headline figure is present value. With 50,000 amount in the future, 6 % discount rate and 10 years years away, that comes to 27,919.74. Change any field and the figure moves with it.