Product Research and Reviews

Present Value Concept in Time Value of Money:

The present value is a financial concept used in the Time Value of Money (TVM) framework, which is based on the idea that a sum of money has a different value today than its future value. In other words, the present value represents the current worth of a future sum of money, considering a certain discount rate.

The principle behind present value is rooted in the opportunity cost of money over time. Money has the potential to earn interest or have alternative uses, so a dollar received today is generally worth more than the same dollar received in the future.

Present value of constant cash flows

The present value is calculated using the discount rate, which reflects the rate of return that could be earned on an investment or the cost of borrowing money. The formula for present value is:

PV = FV / (1+r)

Where:

  • is the present value,
  • is the future value,
  • is the discount rate, and
  • is the number of periods.

PV Calculator User Guidance:

1. Discount Rate (r):

  • Input the discount rate as a percentage. This represents the rate at which future cash flows are discounted. For example, enter 5 for a 5% discount rate.

2. Cash Flows (CF1, CF2, …):

  • Enter the expected cash inflows for each period. These represent the returns or income generated over time. Use positive values for cash inflows.

5. Calculate PV:

  • Click the “Calculate” button to compute the Present Value based on the provided inputs.

Example: Let’s consider an example:

  • Discount Rate (r): 5%
  • Enter the number of years you expect to generate cash e.g., 10 years
  • Cash Flows are some constant amount say $1000

The PV should be $7721.73, indicating the present value of the cash flows discounted at a 5% rate.

Present Value Calculator

Present Value Calculator

Present Value:

 

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