Present value is the current worth of future money discounted at an appropriate discount rate. If someone is expected to receive $1000 in a year, the current worth will be less than $1000. The reason behind this is inflation and the earning potential of future money.
You can buy more items now in $1000 than you would be able to after one year. The present value is calculated using this formula:
Present Value = Future Value x (1+i)-n
Assume that you are expecting to receive $5000 three years from now. If the discount rate is 7% what is the present value of $5000 now.
Present Value = $5000 x (1+7%)-5 = $3917.63
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