Present value

What an amount of money arriving in the future is worth today, once discounted at a chosen rate.

Example

1,360,489 arriving in five years, discounted at 10%, is worth 1,360,489 divided by 1.61051, or 844,758 today.

Important

The figure is meaningless without the rate that produced it. Two present values computed at different discount rates are not comparable, and the rate is rarely quoted alongside the answer.

Related terms

  • Discount rate — The annual rate at which future money is reduced to a present value, reflecting both the time you wait and the risk that the money does not arrive.
  • Time value of money — The idea that money available now is worth more than the same amount later, because it can be invested in the meantime.
  • Discounted cash flow — Valuing an asset as the money it will produce, with each future amount reduced to reflect that money arriving later is worth less than money arriving now.

Lessons that explain it

  • Rates up, price down: the mechanism, and exactly how far — A bond's price is not an opinion. Given a yield, it is the present value of a schedule - and the size of the move when yields shift is a number you can compute in advance. (14 min)
  • For most people, their future earnings are the largest asset they own — Human capital - the value of your ability to earn - is usually worth far more than a young person's savings. Education, skills and health are ways of investing in it, with real costs and uncertain returns. (9 min)
  • The real price includes the income you give up and the years the skill stays valuable — A self-investment's full cost is fees plus lost earnings plus time. Its value depends on how large the earnings difference is and how long it lasts before the skill ages. (12 min)
  • Discounted cash flow: the method that shows its assumptions — A discounted cash flow states every assumption out loud, which is its great virtue and the reason it is so easy to abuse. The output moves enormously on inputs that cannot be observed. (14 min)

All 578 terms in the Investing glossary