What is present value?

The definition of present value is the current value of an amount of money that we will receive later in the future. To calculate the present value it is necessary to know two aspects, on the one hand, the money flows that we will obtain and a rate that allows these flows to be discounted.

The present value concept is intended to demonstrate that it is always preferable to have that amount of money today rather than later. By having that capital you can always invest to make it productive. For example, use it to buy shares or place it in the bank to obtain interest. Even if you do not have a specific investment plan, it will always be at your disposal to enjoy it, without the need to wait.

The term present value is used quite frequently to specify whether or not it is necessary to invest in a certain project, value the assets that you already have, etc.

With all this, the present value and the future value shows the value of the same money in different phases of time. It is advisable to have that money at the present time instead of waiting for the future, unless we have the security of obtaining interest for it.

How to calculate the present value?

Thanks to the present value formula you can draw many conclusions. Is the next:

VP = Fn / (1 + r)n

In the future we will receive an amount of money, where n are years in the future or periods in the future, while the discount rate is r%, which shows the opportunity cost.

In the case of obtaining different flows of money in various periods of time, the present value formula would be:

VP = F0 + F1 / (1+r) + F2 / (1+r)2 + ... + Fn / (1 + r)n

Fi = Flows (i = 0, 1, 2, 3, ... n)

r = discount rate

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