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.
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In This Series

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. 
Financial Advisor
Understanding Net Present Value
Learn how this value is used to determine the worth of a project. 
Investing
Why Stocks Outperform Bonds
Why have stocks historically produced higher returns than bonds? It's all a matter of risk. 
Investing
The Importance Of Knowing Your Net Worth
It is vital that you track your net worth no matter what your age. 
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
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. 
Trading
Choosing Between DollarCost And Value Averaging
These are two investing practices that seek to counter our natural inclination toward market timing by canceling out some of the risk. 
Retirement
Lump Sum Versus Regular Pension Payments
If you're about to retire, you may be facing this dilemma soon. Find out what your options are.