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:
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.
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.