Financial modelling terms explained

# Present Value

Present Value - the value of a future sum of money that is discounted to the present using a given interest rate.

## What is Present Value?

The present value (PV) of a cash flow stream is the sum of the present values of each individual cash flow in the stream. It is a measure of the current value of a future cash flow stream. The present value calculation takes into account the time value of money, or the fact that money available today is worth more than the same amount of money available in the future. This is because the money available today can be invested and earn interest, while the money available in the future cannot. The present value calculation also takes into account the risk of the cash flow stream. A cash flow that is more certain will have a higher present value than a cash flow that is less certain.

## How Do You Calculate Present Value?

The present value (PV) of a cash flow stream is the sum of the present values of each individual cash flow in the stream. To calculate the present value of a cash flow stream, you need to know the discount rate and the number of periods over which the cash flows will be spread. The discount rate is the rate of return that you require on your investment in order to break even - that is, to receive the same return as you would from investing in a risk-free security. The number of periods is the number of years, months, or days over which the cash flows will be spread.

To calculate the present value of a cash flow stream, you first need to calculate the present value of each individual cash flow. The present value of a cash flow is the value of that cash flow at the present time, discounted back to the original investment date at the discount rate. The discount rate is multiplied by the present value of one period's cash flow to calculate the present value of a cash flow stream.

## Why Is It Important to Know Your Present Value?

The present value of a future cash flow is the value of that cash flow at the present time. It is important to know the present value of a future cash flow because it allows you to compare the value of that cash flow at different points in time. For example, if you are considering whether to invest in a project that will generate a future cash flow, you would want to know the present value of that cash flow so you can compare it to the cost of the investment.

Another reason it is important to know the present value of a future cash flow is because it can be used to calculate the return on investment for a project. The return on investment is the percentage of return on the investment divided by the percentage of the investment that has been paid back. To calculate the return on investment for a project, you would need to know the present value of the cash flow from the project and the cost of the investment.

## What's the Difference Between a Present Value and a Future Value?

The difference between a present value and a future value is that a present value discounts future cash flows to their present value, while a future value discounts present cash flows to their future value. This is due to the time value of money, which states that money available at present is worth more than the same amount of money available in the future. This is because money can be invested now and earn interest, whereas money in the future may not be able to earn interest.

## What is An Example of Present Value?

An example of present value would be if someone offered to pay you \$10,000 today, versus \$11,000 a year from now. The present value of the \$11,000 a year from now is \$10,000 today, because the \$11,000 a year from now is discounted by the amount of time it is in the future.

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