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What does Present Value mean?
Present value is also referred to as the "discounted value". It is the current value of a future sum of money given a specified rate of return.
Importance of Present Value
It is used independently in many areas of finance to discount future values for business analysis. Also, it is used as a component of other financial formulas.
Present value = FV / (1 + r)n
FV = future value
r = rate
n = number of periods
Let’s consider that a person asks you for $10,000 promising to pay it back after a period of 5 years. If we calculate the present value of that future with an inflation rate of 7%. Then, according to the above formula the Present Value is $7,129.86.