Present Value

Present value accounts for the time value of money i.e it acknowledges that an amount of money received in the future is worth less than the same amount received today, if nothing more because of the effects of inflation and because money received today can be invested at a positive rate of return. Present value represents the value today of future cash flows discounted using a discount rate (which can be any rate the discounter chooses, including the risk-free rate of return, the company’s cost of capital or the required rate of return). Present value calculations are widely used to determine which of two or more projects or investment options are optimal from a returns perspective.