net amount of discounted expected cash flows relating to an asset or liability.
Stated another way, present value is the principal that must be
invested at time period zero to produce the known future value.
The process of converting the future value to the present value
is referred to as discounting. Present
value problems can assume this form:
If $1,688.96 is to be received four years in the future, what is
its present value if the discount rate is 14%?
The present value in this illustration can be computed by using
the following formula:
pv = present value of any given future amount due in the future
= a future amount
present value of $1,688.96 received at the end of four years discounted
at 14% is $1,000 calculated as follows:
present value of an annuity is the amount that must be invested now and,
if left to earn compound interest, will provide for the receipt or payment
of a series of equal rents at regular intervals.
Over a period of time, the present value balance increases periodically
for interest and decreases periodically for each rent paid or received.
are available that make present value computations relatively easy.
CHARLES J. Financial Managers
Desktop Reference to Money, Time, Interest and Yield.