The Time Value of Money (TVM)
"A rupee today is worth more than a rupee tomorrow." This is the fundamental principle of finance. Because money can earn interest, receiving ₹1 Lakh today is better than receiving ₹1 Lakh five years from now.
What is Present Value (PV)?
Present Value tells you how much a future sum of money is worth in today's terms, given a specific rate of return (Discount Rate). It helps in planning goals:
- Goal: "I need ₹20 Lakhs for my daughter's education in 10 years."
- Question: "How much lumpsum should I invest today at 10% return to achieve that?"
- Answer: The Present Value calculator gives you this exact number.
The Formula
PV = FV / (1 + r)^n
Where FV = Future Value, r = Annual Rate, n = Years
Inflation and Purchasing Power
PV is also used to clarify the impact of inflation. If inflation is 6%, then ₹1 Crore in 20 years will only buy goods worth roughly ₹30 Lakhs in today's money. Calculating the PV of your retirement corpus is essential to ensure you aren't under-saving.
Discount Rate Simplified
The "Discount Rate" is simply the interest rate you expect to earn (Opportunity Cost). If you can earn 7% in an FD, then 7% is your discount rate. If you are a risky investor, maybe use 12%.
The Rule of 72, 114, and 144
Present Value helps you reverse-engineer these famous rules used to calculate doubling/tripling times:
- Rule of 72: Divide 72 by interest rate to see when money doubles.
- Rule of 114: Divide 114 by rate to see when money triples.
- Rule of 144: Divide 144 by rate to see when money quadruples.
Pension Plan Analysis
Insurance agents often sell plans promising "₹1 Crore on Retirement". Using the PV calculator, if you check the value of ₹1 Crore after 30 years at 6% inflation, it is only worth ~₹17 Lakhs today. This shock often helps investors realize they need to save much more or choose better assets (Equity).
FAQs
- Why is it called 'Discounting'?
- Because you are reducing (discounting) the future value back to the present. It is the reverse of 'Compounding'.
- Is PV key for retirement?
- Yes. People often target a number like ₹5 Crores. But if that ₹5 Crores is 30 years away, its PV (buying power) might only be ₹80 Lakhs today. You need to aim higher.
- Can PV be negative?
- No, the present value of a positive future sum is always positive, provided the interest rate is greater than -100%. Even with high inflation, it remains non-negative.