How to Calculate Present Value of an Investment: Formula & Examples

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Investment Spending: Definition & Formula

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
Your next lesson will play in 10 seconds
  • 0:00 Present Value Formula Defined
  • 0:29 Formula
  • 2:17 Another Example
  • 3:37 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Speed Speed

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Michael Cozad

Michael is a financial planner and has a master's degree in financial services.

This lesson will provide an overview of how to calculate the present value of an investment. Various examples will also be explored using the present value formula. You can test your knowledge of the material with a quiz at the end of the lesson.

Present Value Formula Defined

Have you ever dreamed of paying cash for a new car, covering all of your children's college education or leaving an inheritance for your heirs? Maybe you have an idea of how much your goals will cost but just don't know how much to save today. The present value formula can help you calculate how much to save now in order to reach a certain level at a predetermined date in the future.


Imagine our fictitious client, Dr. Jeff Fox, has just had a daughter. Dr. Fox is a family physician and understands the importance of saving. He wants to set up an inheritance account for his daughter. By the time she is 20, he wants to have $100,000 saved for her to give to her for her birthday.

The present value formula can help Dr. Fox in determining how much money he should set aside today to reach his goal for the future. Dr. Fox believes he can earn 5% per year in compound interest, or interest that builds on the principal and increases in value. Our formula to calculate present value is:

PV = X / ((1+r)^n)

PV = present value

X = future value required

r = periodic rate of return

n = number of periods

In the case of Dr. Fox saving for his daughter's future, the variables are:

PV = present value

X = $100,000

r = 5%

n = 20

We can then fill in the present value formula as follows:

PV = X/((1+r)^n)

PV = $100,000 / ((1+5%)^20)

PV = $100,000 / ((1.05)^20)

PV = $37,688.95

The present value formula shows that if Dr. Fox sets aside $37,688.95 today, he can reach his goal of having $100,000 for his daughter at age 20 if he earns a 5% compound annual rate of return.

To unlock this lesson you must be a Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use

Become a member and start learning now.
Become a Member  Back
What teachers are saying about
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account