Discount future cash back to what it's worth today.
Present value answers the question: how much is a future amount worth right now? A dollar received in the future is worth less than one today because you could invest today's dollar and have more tomorrow. The discount rate represents the opportunity cost of not having the money now. When there are also periodic payments (an annuity), each payment is discounted separately and the results are summed.
Present value of a lump sum
PV = FV ÷ (1 + r)^n
Present value of an annuity
PV_annuity = PMT × [1 − (1+r)^−n] / r
The discount rate should reflect your opportunity cost — what you could earn on a comparable investment with similar risk. For risk-free government bonds, use the prevailing yield. For business cash flows, use the company's weighted average cost of capital (WACC). For personal decisions, your expected investment return is a reasonable proxy.
PV discounts one or more future cash inflows. NPV (Net Present Value) subtracts the initial outlay from that PV, giving the net economic value added. If NPV > 0, the investment creates value. Use the IRR Calculator for a full NPV/IRR analysis of irregular cash flows.
A higher discount rate implies you have more attractive alternative uses for your money. Future cash flows look less appealing in comparison, so their present value falls. This is why rising interest rates reduce bond prices: bonds' fixed future coupons become worth less in today's terms.
Yes. Enter the periodic payment, set Future Value to 0, and input the number of payments and discount rate. The result is the fair price (present value) of that income stream.