Present Value

Definition of Present Value

From the economics point of view, the future amount of money which has already been discounted to determine the present value is known as a present value or present discounted value. It is seen that the present value is always counted less than or equal to the future value because money has the potential of earning interest.

• Present value (also known as discounted value) is used to determine the current worth of a future sum the movement of cash flows within a specific time limit. Discounting is used on the future cash flows at a discount rate. And the higher the discount rate, the lower the present value of the future cash flows. The key of valuing future cash flow properly, one needs to determine appropriate discount rate, whether there would be earnings or obligations.

• The usage of Present value is to make a comparison between cash flows that don’t occur relatively.

Books on Present Value

Book 1:

Basic Accounting Principles for Lawyers: With Present Value and Expected Value By C. Steven Bradford, Gary Adna Ames (published by LexisNexis, 2008)

Book 2:

Managerial Accounting for Libraries and Other Not-for-profit Organizations By G. Stevenson Smith (published by American Library Association, 2002)

How Present Value works?

• Present value calculations are applied to decide the value of annuities, mortgages, loans, and bond yields, perpetuities, sinking funds, spot rates, pension obligations and more. If a person learns to use the financial calculator to get the calculations of the present value can help to decide if you should accept a cash rebate or not.

• The real ides of Present value is that receiving $1,000 now is more worthy than receiving the same amount in next five years, the reason it shows that if you get the money now you have options of investment and you would receive additional interest return over the time of five years.

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