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Present value

The amount of cash today that is equivalent in value to a payment, or to a stream of payments, to be received in the future. To determine the present value, each future cash flow is multiplied by a present value factor. For example, if the opportunity cost of funds is 10%, the present value of $100 to be received in one year is $100 x [1/(1 + 0.10)] = $91.

Present value (PV)

The current value of future cash payments when the payments are discounted by a rate that is a function of the interest rate. For example, the present value of $1,000 to be received in two years is $812 when the $1,000 is discounted at an annual rate of 11%. Conversely, $812 invested at an annual return of 11% would produce a sum of $1,000 in two years. Compare future value. See also net present value.

Present Value

The worth of a future amount of money at specific point in time. If one expects an investment to result in a cash flow at a certain time in the future, calculating the cash flow's present value will help the investor decide whether the investment results in a real profit. Calculating the present value assumes that the investor knows both the future amount and the applicable interest rate or rate of return. One discounts the interest rate or rate of return from the future amount in order to arrive at the present value. Mathematically, this is expressed as:

Ct = C (1 + i)-t where C is money, t is a number of years, and i is the interest rate or rate of return.

Present value of money is important in calculating bond yields, the value of annuities, and many other transactions. It is also used in comparing the value of two amounts of money existing in different times. See also: Adjusted for inflation.

Present value

Today's value for income to be received in the future. Two factors affect the analysis:(1) the perceived risk that one might receive nothing at all in the future, or a smaller amount than expected, and (2) the potential income from alternative...