Present value is future value run backwards. Money arriving later is worth less than money in hand, both because it could have been invested in the meantime and because it may not arrive at all. Discounting converts a future amount into the sum you would accept today instead.
The discount rate carries all the judgement. A higher rate means you demand more compensation for waiting, so distant money is worth proportionally less. This is why long-dated cash flows are so sensitive to the rate chosen, and why arguments about discount rates decide so many investment cases.
On the defaults — $100,000 arriving in 10 years discounted at 6.0% — the present value is $55,839. Nearly 44% of the headline amount is stripped away simply by the wait.
The formula
PV- Present value today
FV- Lump sum arriving in the future
PMT- Recurring payment received each period
r- Discount rate per period
n- Number of periods until receipt
How to use this calculator
- Enter the future lump sum, if there is one.
- Enter any recurring payment received each period.
- Set the discount rate per period and the number of periods.
- The gauge shows total present value; the discount applied appears below.
Worked examples
$100,000 in 10 years at 6.0%
Dividing by 1.60^10 = 1.7908 gives $55,839 today. Put another way, $55,839 invested at 6.0% would grow to exactly $100,000 over the same 10 years.
How much the rate matters
The same $100,000 discounted at 3% is worth $74,409, and at 10% only $38,554. The choice of rate changes the answer by $35,855 on a single cash flow.
How to read your score
Frequently asked questions
What discount rate should I use?
Usually your cost of capital, or the return you could earn on a comparable-risk alternative. There is no universal figure, which is why it is an input. Riskier or more distant cash flows justify a higher rate.
Is discounting the same as adjusting for inflation?
Not quite. Inflation is one component of a discount rate; the rest is the real return you require and a premium for risk. If your cash flows are already stated in today’s money, discount at a real rate rather than a nominal one.
What is a perpetuity worth?
A payment continuing forever is worth PMT ÷ r. At a 5% discount rate, £100 a year forever is worth £2,000 today. The finite formula converges towards this as the number of periods grows large.
Why do the periods and rate have to match?
Because the exponent counts periods. If you enter monthly periods you must enter the monthly rate; mixing an annual rate with a month count applies a year of interest every month and produces nonsense.
Discount factor reference
| Years away | 3% | 5% | 8% | 12% |
|---|---|---|---|---|
| 1 years | 0.9709 | 0.9524 | 0.9259 | 0.8929 |
| 3 years | 0.9151 | 0.8638 | 0.7938 | 0.7118 |
| 5 years | 0.8626 | 0.7835 | 0.6806 | 0.5674 |
| 10 years | 0.7441 | 0.6139 | 0.4632 | 0.3220 |
| 20 years | 0.5537 | 0.3769 | 0.2145 | 0.1037 |
| 30 years | 0.4120 | 0.2314 | 0.0994 | 0.0334 |
Multiply the future amount by the factor to get its present value.