Present Value

In Principles of Corporate Finance the concept of present value is defined as the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. An intuitive understanding of present value is to see it as a mechanism to translate a future value to today: If i get \$100000 5 years from now and correct for inflation and interest, what would the actually value be today

To calculate present value, just discount future Cash Flow by an appropriate rate r. Usually this rate r is called the discount rate, the hurdle rate or Opportunity Cost of capital: For a single period the formula can be written as:

${\text{Present Value (PV)}}$ = ${\frac {C_{1}}{1+r}}$

$C_{1}$ denotes the expected pay off at date 1 (for instance one year in the future). ${1+r}$ denotes the Discount Factor

For multiple varying cash flows in several years the formula changes:

${PV}=\sum {\frac {C_{t}}{(1+r_{t})^{t}}}$

See also Net Present Value