When computing the present value of a stream of cash flows within a given time period, the Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.
What Is Present Value (PV)?
- According to present value, a sum of money is worth more today than it will be later.
- To put it another way, present value demonstrates that money obtained in the future is not as valuable as money received today.
- Unspent funds now could depreciate in value over time at an assumed annual rate owing to inflation or the rate of return on investments, if any.
- In order to calculate the present value, it is necessary to make the assumption that the money might receive a certain rate of return.
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