Single Amount
$
%
Present Value
$0
Annuity
$
▼
%
Present Value
$0
Total Payments $0
What is Present Value?
Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate; the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or debt obligations.
Single Amount vs. Annuity
- Single Amount: A one-time lump sum received or paid at a future date. The present value calculates what that single future amount is worth in today's dollars.
- Annuity: A series of equal payments made at regular intervals over a period of time. The present value of an annuity calculates the current value of all those future payments combined.
Understanding the Discount Rate
The discount rate represents the time value of money. It is the rate of return you could earn on an investment with similar risk. Because money today can be invested to earn a return, a dollar received today is worth more than a dollar received in the future. The discount rate reflects this opportunity cost.