Present Value
What a future sum of money is worth today, given a discount rate — the time value of money in reverse.
What does present value mean?
Present value discounts a future amount back to today, because money you hold now can be invested to grow. It’s used to compare amounts available at different times and to value future payouts.
Put it to use
Related terms
Present Value — frequently asked
Why is a dollar today worth more than a dollar tomorrow?
Because a dollar today can be invested to earn a return, so it grows to more than a dollar by tomorrow. Inflation and risk add to this — money in hand now is more certain and more useful than the same amount later.
How do I calculate present value?
Divide the future amount by (1 + r)^n, where r is the discount rate and n the periods. $10,000 due in 10 years, discounted at 6%, is worth about $5,584 today. A higher discount rate lowers the present value.