Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the future is not worth as much as an equal sum received today.
For example, $1000 received three years from now is not worth as much as $1000 received today. Why is that?
First, if you invested $1000 today, in three years it would be worth more than the original sum, assuming a specified rate of return. Waiting three years to invest the money is three years of lost interest, making the future money worth less than todayâ€™s $1000.
Second, if you have $1000 today, you can buy things at todayâ€™s prices. In three years, inflation will likely have pushed prices higher, lowering the buying power of your $1000.
In each of these examples, there is an implied annual rate at which dollars not spent today can be expected to lose value over time. In the first example, it is the interest rate. In the second, it is the rate of inflation.
To compare present dollars to future dollars, you must discount the future dollars to their present value, using one or both of these rates.Â
The calculation to determine Present Value = CF / (1+r)^{n}
Where, CF is the Cash Flow in the future,Â R is the discount rate andÂ n is the number of years.
Â
In This Series

Investing
Calculating the Present Value of an Annuity
The present value of an annuity is the current, lump sum value of periodic future payments as calculated using a specific rate. 
Investing
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Investing
Discounting With The Discount Rate
The discount rate is the interest rate you need to earn on a given amount of money today to end up with a given amount of money in the future. Let's say you need $1,000 one year from now to go ... 
Investing
Understanding the Time Value of Money
Find out why time really is money by learning to calculate present and future value. 
Investing
Calculating Future Value
Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. 
Investing
How to Calculate Required Rate of Return
Investors use the required rate of return to decide where to put their money, and corporations use it to decide if they should pursue a new project. 
Investing
Why Stocks Outperform Bonds
Why have stocks historically produced higher returns than bonds? It's all a matter of risk. 
Investing
Calculating Present Value Interest Factor
The present value interest factor is a number that makes it easier to calculate the present value of a payment or value to be received in the future. 
Investing
The Importance Of Knowing Your Net Worth
It is vital that you track your net worth no matter what your age.