Present value (PV)

Definition

Present value (PV) in plain English

Present value answers a simple question: how much is money you'll get LATER really worth to you RIGHT NOW? A dollar in your hand today beats a dollar next year, because today's dollar can earn interest (or you'd rather not wait). So to find the value today of a future payment, you shrink it down — the further away and the higher the interest rate, the more you shrink it. If someone promises you $110 a year from now and money earns 10%, that's worth $100 today, because $100 invested at 10% grows into exactly $110. It's the tool that lets you fairly compare money arriving at different times.

Learn these first

• Par value
• Profitability index (PI)

Related Principles of Finance terms

• Adjusted EBITDA
• Amortization
• Annuity
• Annuity due
• Arithmetic mean return
• At the money (ATM)
• Binomial model
• Call option
• Compounding
• Continuous compounding