What Is Present Value (PV)?

Present value (PV) is the current value of a future sum of money or stream of cash flows given 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 properly valuing future cash flows, whether they be earnings or debt obligations.

Key Takeaways

• Present value states that an amount of money today is worth more than the same amount in the future.
• In other words, present value shows that money received in the future is not worth as much as an equal amount received today.
• Unspent money today could lose value in the future by an implied annual rate due to inflation or the rate of return if the money was invested.
• Calculating present value involves assuming that a rate of return could be earned on the funds over the period.
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Understanding Present Value (PV)

Present value is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.