present value

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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

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 ?
It will depend on the interest rate, and the Net Present Value (NPV) of the project with greater present value will be zero, while the less valuable project's NPV will be negative.
assets that earn a fair rate of return and thus have zero net present value).
An examination of the five comparative techniques for evaluating alternative investment opportunities [(1) net present value (NPV), (2) internal rate of return (IRR), (3) modified internal rate of return (MIRR), (4) pay back period, and (5) cash on cash] follows.
A general conclusion that can be drawn from this analysis is that when less volume per acre is harvested, net present values are lower and it becomes more difficult to remain profitable.
Ratios of the net present value of the two valuation approaches are presented.
While, within the scope of this paper, we are not directly concerned with the steps by which a business plan is calculated, we need only two of its outputs: the Net Present Value and the Initial Investment.
With a constant retirement age and increasing life spans, workers born in more recent years will enjoy a longer expected retirement period, thus possibly raising their net present values. While workers with lower educations enjoy modest increases in their net present values, higher income workers' net present values drop precipitously for more recent birth years.
Jensen (1986) defines free cash flow as "cash flow in excess of that required to fund all projects that have positive net present values when discounted at the relevant cost of capital." Whenever [E.sub.M](r) > i > [E.sub.T](r), the optimistic manager wants to take negative net present value projects that he perceives to have positive net present value.
To convert future dollars to present dollars, net present value analysis uses a number called a "discount rate." A discount rate reflects a government's cost of borrowing or a community's preference for present versus future consumption.
In order to find the nature of investment the basic investment appraisal criterion, the Net Present Value of the discounted revenue streams, will be used.
If a lender is comparing the collateral value of a project to its existing loan balance, the net present values become very useful.