GlossaryIntermediate
Present Value
The current worth of a future sum of money, discounted back using an assumed rate of return -- reflecting that money today is worth more than the same amount later.
Present value calculates the current worth of a sum of money expected in the future, discounted back at an assumed rate of return — reflecting the basic financial principle that money available today is worth more than the same nominal amount received later, since today's money can be invested in the meantime.
Present value is the conceptual foundation behind Net Present Value and other discounted-cash-flow analysis methods (see Kaavon's "Net Present Value (NPV)" glossary definition), widely used in traditional finance for valuing a stream of future cash flows.
Examples
- A higher assumed discount rate reduces the present value of a given future sum, since it implies a higher opportunity cost for not having that money today.
- Present value is the foundational concept behind Net Present Value and other discounted-cash-flow valuation methods.