Present Value

Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. It is based on the time value of money concept, which holds that a dollar today is worth more than a dollar in the future because it can be invested and earn interest.

The present value calculation discounts future cash flows back to the present using a discount rate. The higher the discount rate, the lower the present value. This is used in investment analysis, capital budgeting, and financial planning to compare investments with different timing of cash flows.

Net present value (NPV) extends this concept by subtracting the initial investment from the present value of all future cash flows. A positive NPV indicates that an investment is expected to generate value exceeding its cost, making it potentially worthwhile.