Building Your Business Operations & Success Accounting How to Calculate the Present Value of a Single Amount Time Value of Money: Present Value of a Single Amount By Rosemary Carlson Rosemary Carlson Rosemary Carlson is a finance instructor, author, and consultant who has written about business and personal finance for The Balance since 2008. Along with teaching finance for nearly three decades at schools including the University of Kentucky, Rosemary has served as a financial consultant for companies including Accenture and has developed online course materials in finance for universities and corporations. learn about our editorial policies Updated on February 6, 2020 In This Article View All In This Article Calculating Present Value Present Value Using the Formula Present Value Using the Tables Present Value Using a Calculator Present Value Using a Spreadsheet The Bottom Line Photo: JGI/Blend Images/Getty Images Understanding the concept of present value and how to calculate the present value of a single amount is important in real-life situations. Examples include investing, valuing financial assets, and calculating cash flow. Calculating Present Value Let’s say you just graduated from college and you’re going to work for a few years, but your dream is to own your own business. You have some money now, but you don’t know how much, if any, you will be able to save before you buy your business in five years. You can use the calculation for present value of a single amount to find out how much you should deposit or invest today if the interest rate (or capital gains plus dividends) is 5% and you will need $25,000 to buy your business in five years. Calculating Present Value Using the Formula Here is the formula for present value of a single amount (PV), which is the exact opposite of future value of a lump sum: PV = FV x [1/(1 +i)t] In this formula: FV = the future valuei = interest ratet = number of time periods You can fill in the formula with your specific information including the future value of the money you'll need to buy your business ($25,000), the interest rate you'll receive in this time (5%), and the time period in which you hope to buy your business (five years): PV = $25,000 x [1/(1 + .05)5] PV = $19,588 In this case, if you have $19,588 now and you can earn 5% interest on it for the next five years, you can buy your business for $25,000 without adding any more money to your account. This is the concept of present value of a single amount. It shows you how much a sum that you are supposed to have in the future is worth to you today. We are applying the concept to how much money we need to buy a business. Given our time frame of five years and a 5% interest rate, we can find the present value of that sum of money. Note Calculating present value is called discounting. Discounting cash flows, like our $25,000, simply means that we take inflation and the fact that money can earn interest into account. Since you do not have the $25,000 in your hand today, you cannot earn interest on it, so it is discounted today. Calculating Present Value Using the Tables A set of tables, known as the time value of money interest factor tables, were developed and can be used in place of the formula to simplify the calculation. The value in the table is used in place of this part of the formula: [1/(1 + i)t] Michael/IPTC Photos In order to get the value that you will insert into the formula in the example used in this problem from earlier, we can use the table in the image above. Go down the left column to the number of time periods (five) and across the row to the interest rate column that matches your interest rate (5%). You will find the number .7835. Insert this number into the formula in place of [1/(1 + i)t], like so: PV = $25,000 x .7835 PV = $19,588 Calculating Present Value Using a Financial Calculator You can calculate the present value of a single amount with just about any financial calculator. With some variations based on the brand of calculator, you can enter the following based on the numbers from the previous example: Press 5 NPress 5 I/YRPress 0 PMTPress 25000 FVYou will get 19,588. Drop the negative symbol in front of it. Calculating Present Value Using a Spreadsheet Spreadsheets, such as Microsoft Excel or Google Sheets, are well-suited for calculating time-value-of-money problems and other mathematical functions. Here's how it works: Open a new worksheet and click on Financial function.Scroll down the menu and click on PV.This opens a box in a cell in which the information for the problem you are trying to solve will be entered. In the example used in our problem from earlier, you can enter: The interest rate as 0.05The time period as 5The payments as 0The future value as $25,000, expressed as a positive numberIf payments are made at the end (0) or the beginning (1) It will look like this once all of the info is added: PV = (5%, 5, 0, 25000, 0) Click enter on your keyboard and you'll see the value returned is -19,588. Remove the negative symbol in front of it and you get 19,588 or $19,588, as we got with our other formulas. The Bottom Line The present value of a single amount allows us to determine what the value of a lump sum to be received in the future is worth to us today. It is worth more than today due to the power of compound interest. There are five key elements in all time-value-of-money calculations. These elements are present value and future value, as well as the interest rate, the number of payment periods, and the payment principal sum. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Academia.edu. "Time Value of Money (2)," Page 2, Feb. 6, 2020. Academia.edu. "Advances in Teaching the Time Value of Money," Page 2. Accessed Feb. 6, 2020. Academia.edu. "Time Value of Money (2)." Accessed Feb. 6, 2020. Academia.edu. "Time Value of Money (2)," Page 5. Accessed Feb. 6, 2020.