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:

$\Large \text{Present Value (PV)}$ = $\LARGE \frac {C_1}{1+r}$

$\large C_1$ 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:

$\Large {PV} = \sum{\frac{C_t}{(1+r_t)^t}}$

See also [[Net Present Value]]
bag
finance_public
created
Thu, 19 Jan 2012 15:51:22 GMT
creator
dirkjan
modified
Thu, 19 Jan 2012 15:51:22 GMT
modifier
dirkjan
tags
M12
Principles of Corporate Finance
Term
creator
dirkjan