The formulas
Single future amount:
PV = FV ÷ (1 + r)n
Equal periodic cash flows (ordinary annuity):
PV = PMT × [1 − (1 + r)−n] ÷ r
Where r is the per-period discount rate and n is the number of periods.
When to use present value
- Pension lump-sum offers: compare taking a one-time payment vs monthly pension.
- Loan settlements: what's the right lump sum to pay off a series of EMIs early?
- Investment analysis: is a project's expected cash flow worth the upfront cost?
- Inflation adjustment: what is a future salary worth in today's money?
FAQ
What discount rate should I use?
Use the rate of return you could earn on a comparable-risk alternative. For safe cash flows: risk-free rate (government bond yield). For risky: required return including risk premium. Common defaults: 6-10%.
What if the payments are not equal?
Use the IRR/NPV calculator for uneven cash flows — this one assumes equal periodic payments.