Introduction
Present value is the current value of an amount in the future. If we talk about economics, present value is referred to as present discounted value, and in finance it is called cash flow, is a future amount of money that is discounted to reproduce its present value, as if it lived today. The present discount value is always fewer than or equivalent to the future value since money has interest-earning potential, a feature referred to as the time value of money.
The present value of a future amount of money or present discounted value or cash flow is given as a particular rate of return. Future present values are discounted at the interest rate, and the superior the interest rate, the inferior the present value of the future cash flows. Finding a suitable discount rate is the core to appropriately valuing future cash flows, whether they be earning or duty. Present Value also referred to as “discounted value”
The formula for calculating the present value or cash flow is:
PV = CF/(1+r)n
OR
CF = PV(1+r)n
Where CF is the future value of money that is discounted, n is the number of periods in which the current date and the date where the amount is charged, i is the discounted rate for a time period (when the interest is applied is considered as the time period, for example, annually, quarterly, monthly, weekly, daily). The interest rate i, is provided as a percentage, but explicit as a decimal value in this formula.
Explanation:
Assume that you received $2000 now, but it will have more than $2000 after ten years because if you get the money now, you can invest it and obtain an extra amount of money over the ten years.
For example, let’s assume that, if the present value of $1000 is used or got and the interest rate is 10 percent, then one year from now is $1000 divided by 1.10, which is about $909.
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