When you have a single payment that will be made to you, in this case $5,000, and you know that it will be paid in a certain number of years, in this case 20 years, you can use the present value formula to calculate what that $5,000 is worth today.
Below is the present value formula we'll use to calculate the present value of $5,000 in 20 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 $5,000
- n: This is the number of periods, which is 20 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 $5,000 paid in 20 years for interest rates from 2% to 30%.
As you will see, the present value of $5,000 paid in 20 years can range from $26.31 to $3,364.86.
| Discount Rate | Future Value | Present Value |
| 2% | $5,000 | $3,364.86 |
| 3% | $5,000 | $2,768.38 |
| 4% | $5,000 | $2,281.93 |
| 5% | $5,000 | $1,884.45 |
| 6% | $5,000 | $1,559.02 |
| 7% | $5,000 | $1,292.10 |
| 8% | $5,000 | $1,072.74 |
| 9% | $5,000 | $892.15 |
| 10% | $5,000 | $743.22 |
| 11% | $5,000 | $620.17 |
| 12% | $5,000 | $518.33 |
| 13% | $5,000 | $433.91 |
| 14% | $5,000 | $363.81 |
| 15% | $5,000 | $305.50 |
| 16% | $5,000 | $256.93 |
| 17% | $5,000 | $216.40 |
| 18% | $5,000 | $182.53 |
| 19% | $5,000 | $154.18 |
| 20% | $5,000 | $130.42 |
| 21% | $5,000 | $110.47 |
| 22% | $5,000 | $93.71 |
| 23% | $5,000 | $79.59 |
| 24% | $5,000 | $67.69 |
| 25% | $5,000 | $57.65 |
| 26% | $5,000 | $49.15 |
| 27% | $5,000 | $41.97 |
| 28% | $5,000 | $35.87 |
| 29% | $5,000 | $30.70 |
| 30% | $5,000 | $26.31 |
As mentioned above, the discount rate is highly subjective and will have a big impact on the actual present value of $5,000. A 2% discount rate gives a present value of $3,364.86 while a 30% discount rate would mean a $26.31 present value.
The rate you choose should be somewhat equivalent to the expected rate of return you'd get if you invested $5,000 over the next 20 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.
FAQs
The present value is $1,292.10
The calculation for the present value is shown below.
What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk pay 5% annually? ›
Expert-Verified Answer
Using a calculator or spreadsheet, we can determine that the present value of the security is approximately $10,925. Therefore, if securities of equal risk pay 5% annually, a security that will pay $29,000 in 20 years is worth $10,925 today.
What is the present value of $5000 to be received 10 years from now if the interest rate is 8 percent? ›
Expert-Verified Answer. The present value of $5,000 to be received 10 years from now, with an interest rate of 8 percent, is $2,112.05. In this case, the Future Value is $5,000, the Interest Rate is 8 percent (or 0.08), and the Time Period is 10 years. Therefore, the correct answer is c) $2,112.05.
What is an example of a present value question? ›
For example, suppose you want to know the value today of receiving $15,000 at the end of 5 years if a rate of return of 12% is earned. Another way of asking this question is: What amount would you need to invest today at 12% compounded annually in order to receive $15,000 after 5 years?
What is the present value of $100 for 20 years at 10 percent per year? ›
The present value of $100 spent or earned twenty years from now is, using an interest rate of 10 percent, $100/(1.10)20, or about $15.
How much will $50 000 be worth in 20 years? ›
Assuming an annual return rate of 7%, investing $50,000 for 20 years can lead to a substantial increase in wealth. If you invest the money in a diversified portfolio of stocks, bonds, and other securities, you could potentially earn a return of $159,411.11 after 20 years.
What is the present value of $5000 per year annuity at a discount rate of 10% for 7 years? ›
Present value of annuity = $11,569.50 (Approximately)
What is the future value of $10 000 in 20 years? ›
As you will see, the future value of $10,000 over 20 years can range from $14,859.47 to $1,900,496.38.
What is the present value of a security that will pay $14000 in 10 years if securities of equal risk pay 4 percent annually? ›
Ans: Present value is $3,732.00.
What is the present value of $5000 received five years from today? ›
Consider a scenario where you expect to earn a $5,000 lump sum payment in five years' time. If the discount rate is 8.25%, you want to know what that payment will be worth today. So you calculate the PV: $5,000/(1 + 0.0825)5 = $3,363.80.
Question: The present value of $5,000 that is to be received 4 years from today, assuming a discount rate of 8%, equals6. 1273.6755.
What is the present value of $5000 to be received five years from now assuming an interest rate of 8%? ›
Final answer: The present value of $5,000 to be received five years from now, assuming an interest rate of 8%, is $3,402.90.
How to calculate the present value? ›
How do you calculate PV?
- The formula for PV looks like this:
- PV = FV/(1+r)n.
- The explanation for each element is:
- PV = the present value in today's money FV = the projected future value of the money r = the expected rate of return, interest rate, or inflation rate.
The formula for calculating the present value is: Present Value = Future Value / (1 + Interest Rate) ^ Number of Years Plugging in the values: Present Value = $1,000 / (1 + 0.12) ^ 2 First, calculate the value inside the parentheses: 1 + 0.12 = 1.12 Now, raise this value to the power of 2: 1.12 ^ 2 = 1.2544 Finally, ...
What is the formula for calculating present value? ›
The present value formula is PV=FV/(1+i)n, where you divide the future value FV by a factor of 1 + i for each period between present and future dates. Input these numbers in the present value calculator for the PV calculation: The future value sum FV. Number of time periods (years) t, which is n in the formula.
How to calculate the present value of a security? ›
How do you calculate PV?
- The formula for PV looks like this:
- PV = FV/(1+r)n.
- The explanation for each element is:
- PV = the present value in today's money FV = the projected future value of the money r = the expected rate of return, interest rate, or inflation rate.
As you will see, the future value of $10,000 over 20 years can range from $14,859.47 to $1,900,496.38.
How do you calculate present value of securities? ›
Calculating present value involves assuming that a rate of return could be earned on the funds over the period. Present value is calculated by taking the expected cash flows of an investment and discounting them to the present day.
What is the present value of an annuity of $5000 per year for seven years discounted at 18%? ›
The present value of an annuity of $5,000 per year for seven years discounted at 18% is computed as follows; Present value of annuity = Annuity x (1 - ( 1 + interest rate )^-time period) / interest rate. Present value of annuity = $5,000 x (1 - ( 1 + 0.18)^-7) / 0.18. Present value of annuity = $5,000 x 2.3139.
