There are a few instances in which you should not use PV in Google Sheets. One is when you are trying to calculate the present value of a series of uneven cash flows. Another instance is when you are trying to calculate the future value of a series of uneven cash flows. Present Value is a formula used in Finance that calculates the present day value of an amount that is received at a future date. The premise of the equation is that there is “time value of money”. The PV function can only be used when cash flows are constant and don’t change. The NPV function can be used to calculate the present value of uneven cash flows spaced evenly in time.

By using the net present value formula, management can estimate whether a potential project is worth pursuing and whether present value formula the company will make money on the deal. Debtors have to pay an interest rate to creditors in order to borrow funds.

Present Value of Future Money

Because of their widespread use, we will use present value tables for solving our examples. Present value provides a basis for assessing the fairness of any future financial benefits or liabilities. For example, a future cash rebate discounted to present value may or may not be worth having a potentially higher purchase price. The same financial calculation applies to 0% financing when buying a car.

Let us take the example of John who is expected to receive $1,000 after 4 years. Determine the present value of the sum today if the discount rate is 5%. Using those assumptions, we arrive at a PV of $7,972 for the $10,000 future cash flow in two years.

Alternative Formula

Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today. Calculating present value involves assuming that a rate of return could be earned on the funds over the period. Maximizing your Social Security benefits is one of the best ways to plan for inflation, since inflation adjustments are automatically worked into your payments. You can also shift more of your investments to assets that perform well in inflationary environments, such as TIPS, real estate, and blue-chip stocks. Present value calculations are the best way to compare one Social Security claiming choice to another.

A comparison of present value with future value best illustrates the principle of the time value of money and the need for charging or paying additional risk-based interest rates. Simply put, the money today is worth more than the same money tomorrow because of the passage of time. Future value can relate to the future cash inflows from investing today’s money, or the future payment required to repay money borrowed today. You would need to deposit $456,858 today in exchange for the security of your $2,000 monthly payment for 30 years. By choosing higher-risk investments, you could earn a higher return on your money, but this deal may sound great to you if you value a low-risk investment and anticipate living a long life. When the discount rate is annual (i.e. as with an interest rate on a certificate of deposit), and the period is a year, this is equivalent to the present value of annuity formula.