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MasterMath

Present Value Calculator

10,000 promised in ten years is worth 6,139 today at a 5% discount rate. Waiting costs you 3,861 in present-day terms.

Currency and number format for

Worth today

—

Worth today—
What waiting costs you—
Divided by a factor of—

How this was worked out

    The formula

    PV = FV ÷ (1 + r)^t

    Where it comes from

    Present value runs compounding backwards. It answers what you would have to put aside today, at a given rate, to end up with a known amount later — which is the same as asking what a future promise is worth right now.

    How to work it out by hand

    1. Turn the discount rate into a decimal
    2. Raise (1 + rate) to the number of years
    3. Divide the future amount by that factor
    4. The result is what it is worth in today's money

    What is worth knowing

    Everything hinges on the discount rate, and choosing it is a judgement, not a calculation. Use the return you could realistically get elsewhere on money of comparable risk: for a safe promise that is close to a government bond yield, and for a risky one it should be considerably higher. Change 5% to 8% on that ten-year promise and its present value drops from 6,139 to 4,632 — a quarter gone, purely from the assumption. This is why two people can value the same lottery payout, pension offer or business deal completely differently and both be right.

    Frequently asked questions

    What discount rate should I use?

    The return you could realistically earn elsewhere on money of similar risk. There is no objectively correct number, which is why the assumption matters more than the arithmetic.

    Is this how a lump sum versus instalments decision is made?

    Yes. Work out the present value of the instalments and compare it with the lump sum. Whichever is higher is the better deal at your discount rate.

    Why is the future amount worth less?

    Because money you have now can be put to work. Waiting means giving up whatever that money would have earned in the meantime.

    Should the rate include inflation?

    If you are discounting a nominal future amount, use a nominal rate. If the future amount is already in today's money, use a real rate. Mixing the two is the most common mistake here.