Present Value (PV)

Present Value (PV) is a financial concept that represents the current worth of a sum of Money or stream of Cash Flows that will be received in the future, discounted back to the present using a specific Interest Rate. The underlying principle is that a certain amount of Money today is worth more than the same amount in the future due to its potential earning capacity.

PV can be calculated using the formula:

PV = FV / (1 + r)^n

Where:

Example 1: If you expect to receive $1,000 in 5 years and the Discount Rate is 5%, the present value would be:

PV = 1000 / (1 + 0.05)^5 = 1000 / 1.27628 ≈ $783.53

Example 2: If you plan to receive $10,000 in 10 years with a Discount Rate of 3%, the present value is:

PV = 10000 / (1 + 0.03)^10 = 10000 / 1.34392 ≈ $7,435.24

Case: In retirement planning, knowing the present value of future savings can help individuals determine how much they need to save today to achieve their desired retirement income.