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Present value is the current value of the future sum of money, at a specified rate of return. The future cash flows would be discounted. The higher the discount rate, the lower is the present value of the future cash flows. The lower the discount rate, the higher would be the present value of future cash flows. You must determine the appropriate discount rate for valuing future cash flows.
The present value tells you if a sum of money today is worth more than the same amount in the future. The present value shows you that the money you receive in the future is not worth the money you receive today.
How does the present value work? Say, you receive Rs 10,000 today. It is worth more than Rs 10,000 received four years later. It is because you get an opportunity to earn interest on the amount. It could be 4%-6% or more depending on where you invest the money. If you get Rs 10,000 after four years, you lose out on the rate of return.
If you receive money today, you buy goods or avail services at today’s rates. Inflation that is the rise in the prices of goods and services makes things costly. In simple terms, inflation lowers the purchasing power of money. If you don’t invest money, inflation eats up its value.
The present value calculator is a simulation that calculates the present value of a certain sum of money in the future. The present value is like compound interest in reverse. A present value calculator is a smart tool that helps you estimate the current amount needed to achieve a future financial goal.
The present value calculator consists of a formula box, where you enter the future amount, interest rate per year, or discount rate, and the number of years. The calculator will display the present value of the investment.
The present value calculator calculates the present-day value (PV) of an amount that you receive in the future.
You must use the mathematical formula:
PV = C / (1+r)^n
PV = Present Value
C = Cash Flow at a period
n = number of period
r = rate of return
You have the concept of the time value of money, that shows you how money received today is worth more in the future. Let us suppose that you need Rs 1,00,000 precisely five years from today. You expect to earn 8% from an investment. The number of periods would be five.
C = Rs 1,00,000
n = 5
r = 8%
PV = 1,00,000 / (1+0.08)^5
PV = Rs 68,058.
The ClearTax Present Value Calculator shows the present value of a fixed sum in the future. To use the ClearTax Present Value Calculator:
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