NPV - Net Present Value Calculator
Use this present value calculator to compute the value today of a lump sum payment in the future - discounted for inflation and the time value of money.
The net present value calculates your preference for money today over money in the future because inflation decreases your purchasing power over time.
If you want to calculate the present value of a stream of payments instead of a one time, lump sum payment then try our present value of annuity calculator here.
What Is The Present Value Of A Future Lump Sum?
Let’s suppose you are receiving a lump sum of money in the future.
It’s best to think of that lump sum in today’s dollars, to avoid unrealistic optimism.
The Present Value Calculator can help you convert a future lump sum into today’s dollars for a realistic idea of the value you’ll receive.
Read more about present value to learn about the factors that affect the value of your money.
Net Present Value
Net present value (NPV) is the value of your future money in today’s dollars. The concept is that a dollar today is not worth the same amount as a dollar tomorrow.
Net present value is considered a standard way of making investment decisions. The formula involves several components that allow an entity to make informed decisions when reviewing several different investments. While present value calculations are most often used by businesses, having a good understanding of net present value helps a family make better financial decisions.
Net Present Value Illustration
Suppose one person owes you money for $10,000 and that person promised to pay you after five years. If we calculate the present value of your $10,000 with an inflation rate of 7% using the net present value calculator above, the result will be $7,129.86. The result is not very impressive and it is considered a loss.
To cover up for the loss you may need to charge interest so that you will still have the same value as $10,000 today at the end of five years.
Present Value Formula
It is important to understand that the three most important components of present value are time, expected rate of return, and the size of the future cash amount. Let’s take a look at the present value formula:
PV = FV/(1+r)n
PV = Present value, also known as present discounted value, is the value on a given date of a payment.
FV = This is the projected amount of money in the future
r = the periodic rate of return, interest or inflation rate
n = number of years
When Is The Present Value Used?
The present value formula has a broad range of uses. Aside from the various areas of finance where present value analysis is used, the formula is also used as a component of other financial formulas.
Present value is also useful when you are planning for an early retirement or you would want to calculate your future income and expenses. Present value can be used to give you a rough idea of the amount you need to have saved at the start of retirement to meet your spending needs. Compare that to what you have saved now – or what you think you’ll have saved by your retirement date – and you’ll have a rough idea of whether you’re on track or not.
To give you a full picture if you can live with the lump sum money that you will have during retirement, use the Present Value Calculator to determine the net present value of the amount.
Pros And Cons Of The Present Value Method
Net present value is easy to use and easily customizable. The rates can be adjusted to reflect risks and other factors affecting your investments.
Another advantage of the net present value method is its ability to compare investments. As long as the NPV of all options are accounted at the same point in time, the investor can compare the scale of each investment. The project with the highest net present value will provide the most additional value for the firm. However, if the results are all negative, the company should decide against investing in any of the options.
There are few disadvantages of using the net present value method. However, one disadvantage of the net present value method is the estimate is not 100% accurate since it only uses assumptions. As we all know, not all assumptions will turn out to be accurate. It is only accurate if you know the exact discount or inflation rates for the duration of the project, the exact future amount, and the year of occurrence.
Another problem with using the net present value method is that it does not fully account for opportunity cost, and you cannot view the full picture of an investment’s gain or loss. However, you may choose to add your missed opportunity cost to the calculation.
The Present Value Calculator is an excellent tool to help you account for value over time. Simply knowing about future value and using it in your calculations will help you save money and make better investment decisions.
Present Value Calculator Terms & Definitions
- Future Value – The value of an asset at a specific date in the future.
- Inflation Rate – The rate at which the general level of prices for services and goods is rising, and, subsequently, purchasing power is falling.
- Compound Interval – How often inflation compounds.
- Present Value – The value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest.
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