InvestorQ : Can you tell me a practical application of present value?
Nishant Chandani made post

Can you tell me a practical application of present value?

Answer
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Abhi Yadav answered.
1 year ago


The formula for computing the present value of a sum is the inverse of the future value. You discount future cash flows to the current value. Its application in finance is a lot more interesting than future value. Note that the present value is simply the inverse of the future value.

Let us take an illustration. You want to find out how much must be deposited in a bank account that pays 5% interest per year in order to be worth Rs.1,000 in three years? In this case, t = 3, r = 5% and FV3 = Rs.1,000. Here you go for present value.

Present Value Or What must be deposited to get Rs.1,000 = 1,000/(1.1576) = Rs.863.84. In other words, if you have a payable of Rs.1000 after 3 years then you must invest Rs.863.84 today at 5% so that the amount grows to Rs.1000 in 3 years. This is one of the most fundamental and important concepts in understanding investments and financial planning.