# How to Calculate the Present Value of a Single Amount

Understanding the present value of a single amount of money is an important concept in investing, calculating valuations and , and in many other financial situations.

Three approaches to solving the problem of calculating the present value of a single amount (one type of ​) are commonly employed: present value of a single amount formula; a financial calculator; or a spreadsheet application, such as Excel.

### Calculating Present Value

The first thing to remember is that present value of a single amount is the exact opposite of future value. Here is the formula:

PV = FV [1/(1 + I)t]

Consider this problem:

Let's say that you have been promised \$1,464 four years from today and the interest rate is 10%. The year (t) is year 4. We want to know what that \$1,464 is worth today (the present value) given that the interest rate is 10% and the year is 4. Using the present value of a single amount formula, we can calculate the present value of \$1,464 if the interest rate is 10% at the end of 4 years using the formula:

PV = 1,464 [1/(1 + .10)]4 = \$1,000

Calculating present value is called . Discounting cash flows, like our \$1,464, simply means that we take inflation and the fact that money can earn interest into account. Since you do not have the \$1,464 in your hand today, you cannot earn interest on it, so it is discounted today.

Clearly, using the formula is the long way to do present value problems. Using a financial calculator or a spreadsheet application is a more efficient way to calculate present value.

### Calculating Present Value Using a Financial Calculator

You can find the present value of a single amount with any calculator with an exponential function, even non-financial calculators. It is best to use because they have five keys which correspond to the five variables in time value of money equations. This present value of a single amount equation that we calculated above uses only four of those variables. Look at your financial calculator. Here are the key and inputs that you punch:

Punch N and 4 (for 2 years)

Punch I/YR and 10 (for the interest rate of 5%)

Punch FV and 1,464 (for the amount of money we are calculating interest on in year 4)

Punch PMT and PMT (there are no payments beyond the first one)

### Calculating Present Value Using a Spreadsheet

Spreadsheets, such as , are well-suited for calculating time value of money problems and other mathematical functions. The function used for present value of a lump sum on an Excel spreadsheet is:

PV(rate,nper,pmt,fv,type) OR

=PV(0,10,4,0,1464,0)

Specifically:

• Go to an Excel worksheet and click on Financial function.
• Pull down a menu and click on PV.
• This opens a box in which the information for the problem you are trying to solve is entered.

In the example we are using:

• Interest rate of 0.10
• Time period of 4 (years)
• Payments of 0
• Future value of \$1,464 expressed as a positive number
• 0 is entered for the last item, which means that a payment, if any, would be at the end of the time period

This completes the function above. Go to the right-hand side of the worksheet at the top and click on Calculate. You will get the answer of \$1,000.

This will help you with practicing calculations for present value of a single amount.