What is Present Value?

Present Value is what a future amount of money is worth TODAY. $200 in 1 year is worth less than $200 today — because today you could invest it and have more in the future.

Formula

PV = FV ÷ (1 + i)^n

Where:

  • PV = Present Value
  • FV = Future Value
  • i = interest rate
  • n = number of periods

Practical example

Someone offers you $2,000 in 2 years. With the central bank base rate at 13% per year, what is it worth today?

PV = 2,000 ÷ (1.13)² = 2,000 ÷ 1.2769 = $1,566

In other words: receiving $2,000 in 2 years is the same as receiving $1,566 today.

What it’s used for

  1. Comparing investments with different terms
  2. Evaluating proposals (“pay $10,000 upfront or $12,000 in 12 installments?”)
  3. Pricing fixed-income securities
  4. Business decisions (is this project worth it?)

Application in everyday life

When a store offers “12 installments with no interest of $20 or $200 upfront”:

  • 12 installments = $240 in total
  • But the present value of 12 installments of $20 is less than $240
  • If you can invest the money at 1%/month, paying in installments and investing the difference is better

Simple rule

Money today is worth more than money tomorrow. Always consider the “cost of time” when making financial decisions.