Present Value: The Time Value of Money
A pound today is worth more than a pound in the future. This is the core principle of present value (PV) — also called discounting. Money available now can be invested to earn a return; future money is uncertain; and inflation erodes purchasing power. PV translates future amounts into today's equivalent value.
Present Value Formula
PV = FV ÷ (1 + r)ⁿ
FV = future value
r = discount rate (per period)
n = number of periodsExamples
- Receive £10,000 in 5 years, discount rate 6%: PV = 10,000 ÷ 1.06⁵ = £7,473
- Receive £50,000 in 10 years, discount rate 8%: PV = 50,000 ÷ 1.08¹⁰ = £23,160
Choosing the Discount Rate
- Personal decisions: Your expected investment return (e.g. 6–8%)
- Business decisions: Weighted Average Cost of Capital (WACC)
- Risk adjustment: Higher discount rates for riskier future cash flows
- Inflation only: Use CPI rate to convert to real values
Net Present Value (NPV)
NPV = sum of all discounted future cash flows minus the initial investment. NPV > 0 means the investment creates value at your chosen discount rate. It is the gold standard for capital investment decisions.
Calculate present value: Free Present Value Calculator