• CALCULATING PRESENT VALUE
• NET PRESENT VALUE
• FURTHER READING:

The present value (PV) of an amount to be received in the future is the discounted face value considering the length of time the receipt is deferred and the required rate of return (or appropriate discount rate under the circumstances). The notion of present value presumes that money has a time value—today¹;s dollar is worth more than the same dollar received at a future point in time—deriving from inflation, interest, and other considerations. This idea is used commonly when planning a capital budget.

This notion can be demonstrated by examining three common financial transactions:

• Money invested in bank certificates of deposit may earn interest...