Investing is not everyone’s cup of tea. Although you save yourself the cost of a financial advisor, you are also taking complete financial responsibility for your future in your hands. One mistake could mean the difference between retiring in comfort and living with anxiety. So, either you should have good knowledge, or you need a financial advisor. Therefore it is imperative to keep your finances intact.
You must have thought about the money you will need in the future. Haven’t you? If your answer is no, you must think about future money in present value terms to avoid unrealistic optimism that can make your situation quite weird. Calculating your present value and future value gains is not rocket science. This article will help you with how you can value your present and future value.
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What is Present Value?
How many times have you heard about the present value? What do you understand about it? Present value is the current value of the future sum of money at a specified rate. Where it means that future cash flows will be discounted, the discount rate will lower your amount than the present value. The lower the discount rate, the higher your present value will be. It would be best if you determined the appropriate discount rate to evaluate your cash flow in the future. The present value tells you if a sum of money today is worth more than the same amount in the future.
How Does the Present Value Work?
For instance, you have Rs 10000 today, which is more than the 10000 rupees you received four years later. It is because you get an opportunity to earn interest on the amount. Therefore 4% or 6% or more depending on your investment. So if you get Rs 10000 after 4 years, you lose out on the rate of return.
What you have received today, you buy goods and services at today’s rate. Inflation is the rise in the price of goods and services that clarifies things. In simple terms, inflation lowers the purchasing power of money if you don’t invest money. Hence it makes the value lesser.
How Do Present Value Calculators Work?
There is a particular formula to calculate the present value;
PV= C/(1+r)^n
Where,
PV is your present value.
C is your cash flow at a period
N is the number of periods
R is for the rate of return
How To Use Present Value Calculators?
The present value calculated shows the present value of the fixed sum in the future. To use the calculator, you have to perform the following steps:
- Enter the future amount that you want
- The rate of interest per year is also known as the discount rate.
- Enter the number of years
- The present value calculator shows you the present value of the amount you seek in the future.
What are the Benefits of Using a Calculator?
The present value calculator helps you assess your investment’s future benefits. Therefore, it is on you to choose the best investment according to your investment goals and finances. You can select the best annuity plans and the cost of investment. It helps you to determine the present value of retirement goals.
About Discount Factor
The present cash flow value is calculated by multiplying the cash flow for the projected year by the discount factor. The discount rate and the investing period drive it.
There are two approaches for calculating discount factors. The first is the discount rate, and the second is the discount. The discount rate can be thought of as representing the percentage of return. Mostly, the discount rate remains constant throughout the projection.
Any discount factor equation uses the assumption, and based on that assumption, the discount factor value is calculated between zero and one. The discount factor plays an intergal role when you talk about present value, therefore, the discounted value of money calculator helps most investors to calculate the right amount.
Calculations with the Discount Factor Formula
There are Multiple Uses of the Discount Factor:
- To calculate the net present value
- To assist with financial modeling
- To complete a discounted cash flow analysis
Here is the general formula for calculating the discount factor:
Discount Factor= 1/(1*(1+Discount Rate) Period Number)
This formula can find the periodic interest rate or discount rate. This will easily be determined by dividing the annual discount factor interest rate by the total number of payments per year. Of course, you will also need to know the total number of payments made.
A present value calculator is an excellent tool that will help you. It will help you in your decision-making and investment decisions. Simply knowing about future value and using it for your calculation can save money and help you make a better investment decision.