When you have a single payment that will be made to you, in this case $32,195, and you know that it will be paid in a certain number of years, in this case 5 years, you can use the present value formula to calculate what that $32,195 is worth today.
Below is the present value formula we'll use to calculate the present value of $32,195 in 5 years.
$$Present\: Value = \dfrac{FV}{(1 + r)^{n}}$$
We already have two of the three required variables to calculate this:
- Future Value (FV): This is the $32,195
- n: This is the number of periods, which is 5 years
So what we need to know now is r, which is the discount rate (or rate of return) to apply. It's worth noting that there is no correct discount rate to use here. It's a very personal number than can vary depending on the risk of your investments.
For example, if you invest in the market and you earn on average 8% per year, you can use that number for the discount rate. You can also use a lower discount rate, based on the US Treasury ten year rate, or some average of the two.
The table below shows the present value (PV) of $32,195 paid in 5 years for interest rates from 2% to 30%.
As you will see, the present value of $32,195 paid in 5 years can range from $8,671.05 to $29,160.00.
| Discount Rate | Future Value | Present Value |
|---|---|---|
| 2% | $32,195 | $29,160.00 |
| 3% | $32,195 | $27,771.69 |
| 4% | $32,195 | $26,461.94 |
| 5% | $32,195 | $25,225.62 |
| 6% | $32,195 | $24,057.98 |
| 7% | $32,195 | $22,954.59 |
| 8% | $32,195 | $21,911.38 |
| 9% | $32,195 | $20,924.54 |
| 10% | $32,195 | $19,990.56 |
| 11% | $32,195 | $19,106.17 |
| 12% | $32,195 | $18,268.31 |
| 13% | $32,195 | $17,474.16 |
| 14% | $32,195 | $16,721.07 |
| 15% | $32,195 | $16,006.60 |
| 16% | $32,195 | $15,328.46 |
| 17% | $32,195 | $14,684.50 |
| 18% | $32,195 | $14,072.73 |
| 19% | $32,195 | $13,491.29 |
| 20% | $32,195 | $12,938.45 |
| 21% | $32,195 | $12,412.57 |
| 22% | $32,195 | $11,912.13 |
| 23% | $32,195 | $11,435.70 |
| 24% | $32,195 | $10,981.96 |
| 25% | $32,195 | $10,549.66 |
| 26% | $32,195 | $10,137.61 |
| 27% | $32,195 | $9,744.73 |
| 28% | $32,195 | $9,369.98 |
| 29% | $32,195 | $9,012.39 |
| 30% | $32,195 | $8,671.05 |
As mentioned above, the discount rate is highly subjective and will have a big impact on the actual present value of $32,195. A 2% discount rate gives a present value of $29,160.00 while a 30% discount rate would mean a $8,671.05 present value.
The rate you choose should be somewhat equivalent to the expected rate of return you'd get if you invested $32,195 over the next 5 years. Since this is hard to calculate, especially over longer periods of time, it is often useful to look at a range of present values (from 5% discount rate to 10% discount rate, for example) when making decisions.
Hopefully this article has helped you to understand how to make present value calculations yourself. You can also use our quick present value calculator for specific numbers.