present value

(redirected from present values)
Also found in: Dictionary, Encyclopedia.

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

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 (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 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.

present value

see DISCOUNTED CASH FLOW.

present value

see DISCOUNTED CASH FLOW.

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.)

References in periodicals archive ?
The second reason flows from that assumption: in Keynesian theory, prices of starting investment projects do not fully reflect expected, discounted present values of those projects--instead startup costs are "sticky.
If the stock price meets this criterion and early exercise has not occurred in prior periods, the probability (G7) of this exhibit 1 node is multiplied by the option's intrinsic value (K13) and discounted by the risk-free interest rate (B15) to determine the path's present value (M13).
The broad range of stochastic prices is the consequence of the broad range of likely lifetimes and the fact that the present value of cash flows decreases rapidly as lifetime until death increases.
Based on the projection of cash flows over a five-year period, the investment reveals a positive net present value of $5,000.
7, Using Cash Flow Information and Present Value in Accounting Measurement, provides a framework for using future cash flows as the basis for accounting measurements.
The proportional rental amount is the amount of fixed rent allocated to the rental period multiplied by a fraction the numerator of which is the sum of the present values of the amounts payable under the terms of the section 467 rental agreement as fixed rent and interest thereon and the denominator of which is the sum of the present values of the fixed rent allocated to each rent period under the rental agreement.
However, when you withdraw the $5,877, it is tax free so the net cash increase is $1,877 with a present value of $1,039, or $292 higher than a deductible IRA.
However, assuming that the inflation and interest factors above produce a reasonable discount rate, the present value of the total deductions equals the asset's cost.
In lieu of calculating the cost of capital for a discount rate, some analysts use a range of rates to arrive at a series of present values.
If the one-dollar notes were withdrawn from circulation, and perhaps partially replaced by two-dollar notes, there would be a corresponding reduction in the Federal Reserve's portfolio, and the Treasury would lose the Federal Reserve earnings thereon--estimated at $170 million per year, on average, in present value terms.
This estimated present value is then compared to present values calculated using a wage series discounted by two different discount rates - the 4.
The study concludes that direct shipping of untreated iron ores could immediately generate average annual cash flow of $5 million to $15 million with net present values of $33 to $114 million and rates of return in excess of 230%, depending upon prices received.