What is Present Value?
Present Value is what a future amount of money is worth TODAY. R$ 1,000 in 1 year is worth less than R$ 1,000 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 R$ 10,000 in 2 years. With the Selic rate at 13% per year, what is it worth today?
PV = 10,000 ÷ (1.13)² = 10,000 ÷ 1.2769 = R$ 7,831
In other words: receiving R$ 10,000 in 2 years is the same as receiving R$ 7,831 today.
What it’s used for
- Comparing investments with different terms
- Evaluating proposals (“pay R$ 50,000 upfront or R$ 60,000 in 12 installments?”)
- Pricing fixed-income securities
- Business decisions (is this project worth it?)
Application in everyday life
When a store offers “12 installments with no interest of R$ 100 or R$ 1,000 upfront”:
- 12 installments = R$ 1,200 in total
- But the present value of 12 installments of R$ 100 is less than R$ 1,200
- 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.