1. What is Present Value?

Present Value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. It accounts for the time value of money, which states that a dollar today is worth more than a dollar in the future.

2. How Does the Calculator Work?

The calculator uses the Present Value formula:

Where:

• \( PV \) — Present Value (USD)
• \( FV \) — Future Value (USD)
• \( r \) — Discount rate (decimal)
• \( n \) — Number of periods (unitless)

Explanation: The formula discounts the future value back to present value using the discount rate over the specified number of periods.

3. Importance of Present Value Calculation

Details: Present value calculations are essential in financial analysis, investment decisions, capital budgeting, and comparing cash flows at different times.

4. Using the Calculator

Tips: Enter future value in USD, discount rate as a decimal (e.g., 0.05 for 5%), and number of periods. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between PV and FV?
A: PV is the current value, while FV is what the current amount will grow to in the future with compounding.

Q2: How do I convert annual percentage rate to decimal?
A: Divide the percentage by 100 (e.g., 5% becomes 0.05).

Q3: What are typical periods used?
A: Periods could be years, months, or any time unit, but the discount rate must match the period length.

Q4: Why does present value decrease with higher discount rates?
A: Higher discount rates mean money in the future is worth less today due to greater opportunity cost.

Q5: Can this be used for multiple cash flows?
A: This calculates PV for a single amount. For multiple cash flows, you'd sum the PV of each individual amount.