ESX

Present ValuePV

Today's worth of a future cash amount after discounting it at an appropriate interest or required return rate.

Formula

PV = future value / (1 + r)^n

Also called PV, discounted value.

Present value answers how much a future payment is worth in today’s money. You divide by a growth factor that reflects the return you could earn elsewhere, or the risk of the cash flow. Higher discount rates and longer waits both push present value down.

Key takeaways

Comparing offers that pay at different times requires present value, not raw face amounts.
Choosing the discount rate is a judgement about opportunity cost and risk.
Bond prices and many project appraisals are present value problems in disguise.
A high present value estimate collapses if the cash never arrives as hoped.

Related terms

Time Value of MoneyThe idea that money available now is worth more than the same amount later, because it can earn a return in the meantime.
Interest RateThe cost of borrowing money, or the return paid on savings, expressed as a percentage.
Yield to MaturityThe annualised return you would earn on a bond if you bought it at today's price, received all coupons, and held it to maturity.
ValuationThe process of estimating what a company, asset, or security is worth using prices, cash flows, or comparison methods.

Present Value in our reporting

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