Present Value (PV) Definition

The present value is simply the value of future dollars or currency in present day terms. The present value is simply answering the question how much a dollar in the future is worth today.

Present Value (PV) Explanation

The present value is often used in valuation to discount projections that companies make about themselves so they can figure out how much the company stock price is or maybe its equity value. The present value becomes useful because of inflation. If inflation were to increase at an increasing rate then the company would see the present day dollar as less valuable to them.

Present Value (PV) Formula

The present value formula is as follows:
PV = FV/((1 + i)ⁿ)
Where:
PV = Present Value
FV = Future Value
i = rate
n = number of years or periods

Present Value (PV) Example

Jim Bob has just won the lottery. He has the choice of accepting the $2 million now, or he can accept $1 million now and another $2 million 5 years from now. Which of the choices should Jim Bob take? Assume a rate of 8%.
Option #1 PV = $2 million
Option #2 PV = $500,000 + $1,361,166 = 1,861,166
PV calculation:
PV = 2 million/((1+.08)⁵) = $1,361,166
Option #1 is better because it is worth more to you today than the present payment plus the payment at the end.
If you want to increase the value of your organization, then click here to download the Know Your Economics Worksheet.

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