present value
Also called: PV, discounted value
What a future amount is worth today: the amount divided by (1 + discount rate) raised to the number of years.
Present value (PV) is what a future amount is worth today: PV = amount ÷ (1 + r)ᵗ, where r is the annual discount rate and t the number of years until the money arrives. For several future amounts, discount each one by its own year and add them up.
It is compounding run backwards. If 552,000 put to work at 25% grows to 690,000 in a year, then 690,000 a year from now is worth 552,000 today. Bringing every amount to the same date is what makes sums from different years comparable: first convert, then compare.
Present value is the building block of NPV, discounted LTV and discounted payback. It is only as good as the timing behind it: cash that arrives later (a client on 60-day terms, an invoice sent at quarter end) has a lower present value than the same amount on time. Put each amount on the date the money actually moves, not the date the work is done.
Example
Teams clients offered Klasna four ways to pay. At 25% a year (factors 0.8, 0.64, 0.512):
The biggest sum on paper is the smallest in today's money, and 600,000 now beats all three later offers. Ranked by present value: 600,000 now, then 900,000 in two years, then 700,000 in one, then 1,000,000 in three.
Common mistakes
- Comparing totals across dates. Convert every amount to today first, then compare.
- Putting cash on the wrong date. Use the day the money arrives (payment terms, invoice calendar), not the day the service is delivered.
- Discounting profit instead of cash. Depreciation and accruals move profit between years without moving money.
- Using one factor for all years. Each year has its own factor: 0.8, 0.64, 0.512 at 25%, not 0.8 three times.
- Hiding the rate. A present value means nothing without the rate it was computed at.
Learn it in the course
- Time value of money: why a hryvnia next year is worth less · Time value of money with examples: present value, future value, discounting and the rate you discount at.