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Present Value

Definition

The monetary value today of a future income stream, given a certain rate of return.

What It Means

Present value accounts for the time value of money. The question is:

What is the value of several payments to be received over some future period, in terms of today's dollars?

Since today's dollars can be put into alternative investments, you as the investor determine the present value of the expected payments given your required return on investment. Generally, the riskier the investment, the higher the required rate of return.

Example

Let's assume that you expect a payment of $1,000 in five years and your return is 15% per year. This future payment is worth $497.18 today.

The Discounted Cash Flow business valuation method used in ValuAdder establishes the Present Value of the expected small business income stream.

See Also