Description
Present Value (PV) is a financial concept that assesses the current worth of future cash flows, factoring in the time value of money. It determines the value today of a future sum of money, considering an assumed rate of return or discount rate. The formula for calculating PV involves dividing the future cash flow by the factor of (1 + r) raised to the power of the number of periods away the cash flow occurs. This adjustment reflects the principle that a dollar received today is worth more than a dollar received in the future due to the potential to invest and earn returns. PV calculations are essential for various financial decisions, including investment analysis, project valuation, and determining the fairness of investment opportunities, enabling individuals and businesses to make informed choices based on the present value of future cash flows.