present value – modviz https://www.modviz.com Models Visualized Wed, 11 Nov 2020 17:41:34 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.3 183622482 How to Calculate Present Value https://www.modviz.com/2020/10/05/how-to-calculate-present-value/ https://www.modviz.com/2020/10/05/how-to-calculate-present-value/#respond Mon, 05 Oct 2020 21:26:16 +0000 https://www.modviz.com/?p=70 Continue reading "How to Calculate Present Value"]]> The formula used to discount a future value to a present value today is as follows:

present value formula

Where:

PV = Present Value
FV = Future Value
r = rate
t = time

Assume you would like to have a future lump sum of $10,000. How much would you have to invest today, if the initial contribution grew at required rate of 7.00% for five years? Plugging those values into the formula would yield the following:

FV = $10,000; r = 0.07; t = 5

The amount that is required today, in order to have $10,000 in the future will decrease as a function of either a longer time-frame, or a higher discount rate. Using Excel, we can model the amounts required given a specific time-frame or rate:

Year FV rate PV 
5 $ 10,000.007.00% $ 7,129.86
10 $ 10,000.007.00% $ 5,083.49
15 $ 10,000.007.00% $ 3,624.46
20 $ 10,000.007.00% $ 2,584.19
25 $ 10,000.007.00% $ 1,842.49
30 $ 10,000.007.00% $ 1,313.67
present value table

The data can be represented visually as well:

present value chart

Viewing the chart above, you can see that the initial investment required today, decreases exponentially as a function of time.

Using an HP12C calculator, the present value can be calculated using the following keystrokes:

HP12C

[10,000][FV]
[7][i]
[5][n]
[PV]

A copy of the Excel model can be found here

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