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How to calculate present value

Present value runs compound interest backwards: what is a future amount worth today?

Problem

You’ll need $50,000 in 8 years. If you can earn 6% a year, how much do you need to invest today?

Keystrokes

  1. fFINx≷y
    0.00

    Start clean.

  2. 8n
    8.00

    Eight years.

  3. 6i
    6.00

    6% a year.

  4. 50000FV
    50,000.00

    The amount you need later.

  5. PV
    −31,370.62

    What to invest now.

Answer

Invest $31,370.62 today.

Why it works

PV is FV ÷ (1 + i)ⁿ. The result is negative because it’s money you put in to get the $50,000 out later.

The same idea values any promise of future money: a settlement, a note, or the price of a zero-coupon bond.

Questions

What is a discount rate?

The i you use for present value. It’s the return you could earn elsewhere, so a higher discount rate makes future money worth less today.

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