ⓘ Present value calculations assume a constant discount rate. In reality, interest rates change. Use a rate that reflects the risk of your specific cash flow — higher risk = higher discount rate = lower PV.
Frequently Asked Questions
What is present value (PV)? +
Present Value is today's worth of a future cash flow, discounted at a given rate. Formula: PV = FV / (1 + r)^n. A rupee today is worth more than a rupee in the future because it can be invested now. At 10%, ₹1 lakh due in 5 years is worth only ₹62,092 today.
What is the difference between PV and NPV? +
PV is the current worth of one or more future cash flows. NPV = PV of all future inflows minus the initial investment. If NPV > 0, the investment exceeds your required rate. If NPV < 0, it doesn't. PV is the building block; NPV is the decision metric.
What discount rate should I use? +
The discount rate = your opportunity cost. Risk-free: use FD rate (6-7.5%). Business projects: use WACC or 12-15%. Equity investments: use your required return (10-15%). General financial planning: 10% is widely used as a middle ground for medium-risk cash flows in India.
What is an annuity PV? +
Annuity PV is the lump sum equivalent of a series of equal periodic payments. Formula: PV = PMT × [1 − (1+r)^(−n)] / r. Example: Pension of ₹50K/year for 20 years at 8% discount rate. PV = ₹4,90,907. This is the amount needed today to fund that pension assuming 8% return.
What is the difference between ordinary annuity and annuity due? +
Ordinary annuity: payments at end of period (loans, bonds). Annuity due: payments at start of period (rent, insurance). Annuity due PV = Ordinary Annuity PV × (1 + r). Annuity due is worth more because you receive each payment one period earlier.
How does present value apply to EMI loans? +
Your home loan principal is the PV of all future EMI payments discounted at the loan interest rate. If loan = ₹50L at 8.5% for 20 years, PV of 240 monthly EMIs at 8.5%/12 = exactly ₹50L. This is why reducing the loan term dramatically reduces the total interest — fewer high-discount-factor future payments.