Present Discounted Value

What is the Present Discounted Value?

Present discounted value is the discounted value of a future cash flow stream.

$$Present\; Value=\frac{CF_1}{(1+r)}+\frac{CF_2}{(1+r)^2}+\frac{CF_3}{(1+r)^3}+\frac{CF_4}{(1+r)^4}+\frac{CF_5}{(1+r)^5}$$

$CF$

$CF$ is the cash flow.

$r$

$r$ is the interest rate.

A graph demonstrating cash flows over time.

Present Discounted Value Terminology

Time Value of Money

Time value of money implies that a dollar now is worth more than a dollar in the future because of its earning potential in the time between the present and the future. That current dollar can be deposited into an interest-bearing account or invested in some other asset to earn a rate of return.

Present Value

Present value refers to the dollar value of a cash flow stream at this exact moment. This current valuation is normally used in the calculation of a future valuation of that cash flow stream.