Glossary
Present value
Definition
Present value is today's worth of a future amount, found by discounting it at a rate of return. It underpins pension, lump-sum, lease and valuation decisions. Higher discount rates or longer times produce lower present values.
How present value works
Formula: PV = future amount ÷ (1 + rate)^periods. A stream of payments is valued by discounting each payment.
Choosing the discount rate is the key judgment.
Why it matters to a firm
Present value lets clients compare options fairly across time.
Questions about present value
Why is money today worth more?
Because it can be invested.
What rate should I use?
The return you could realistically earn.
Is it the same as NPV?
NPV subtracts the initial investment.
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Related terms: Future value · Discount rate · Internal rate of return
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