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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.

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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.

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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.

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Present value. The present value of a future payment, or the time value of money, is what money is worth now in relation to what you think it'll be worth in the future based on expected earnings.

For example, if you have a 10% return, $1,000 is the present value of the $1,100 you expect to have a year from now.

The concept of present value is useful in calculating how much you need to invest now in order to meet a certain future goal, such as buying a home or paying college tuition.

Many financial websites and personal investment handbooks provide calculators and other tools to help you compute these amounts based on different rates of return.

Inflation has the opposite effect on the present value of money, accounting for loss of value rather than increase in value. For example, in an economy with 5% annual inflation, $100 is the present value of $95 next year.

Present value also refers to the current value of a securities portfolio. If you compare the present value to the acquisition cost of the portfolio, you can determine its profit or loss.

Further, you can add the present value of each projected interest payment of a fixed income security with one year or more duration to calculate the security's worth.

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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 investments that could be purchased if one were paid the present value for a future income stream.(Discounting is the mathematical calculation used to arrive at present value.)

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Present Value (PV)

What Does Present Value (PV) Mean?

The current worth of a future sum of money or stream of cash flows when there is a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to valuing future cash flows properly, whether they are earnings or obligations. Also referred to as discounted value.

Investopedia explains Present Value (PV)

This may sound confusing, but it really is not. The basic idea is that receiving $1,000 now is worth more than receiving $1,000 five years from now, because a person who has money today can invest it and receive an additional return over the five years. The calculation of discounted value or present value is extremely important in many financial calculations. For example, net present value, bond yields, spot rates, and pension obligations all rely on the principle of discounted value or present value. Learning how to use a financial calculator to make present value calculations can help an investor decide whether to accept a cash rebate, 0% financing on the purchase of a car, or to pay points on a mortgage. Investopedia recommends that investors get a calculator that computes PV.

Related Terms:
• Discount Rate
• Future Value
• Internal Rate of Return—IRR
• Net Present Value—NPV
• Time Value of Money