What Is Present Value?
Present value is what a future amount is worth today (future amounts are discounted by 1/(1 + r)^t, OMB Circular A-4).
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In this lesson you learn to
- Explain why money today is worth more than the same amount later
- Compute present value = future value / (1 + rate)^years for an example
- Describe how a higher rate or a longer wait changes present value
Check yourself: sample questions
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1.What does present value tell you?
Present value is what a future amount is worth today (future amounts are discounted by 1/(1 + r)^t, OMB Circular A-4).
2.Why is money later worth less than the same amount today? Select all that apply.
Several answers can be correct.
Two reasons: invested money normally earns a return, and people prefer consumption sooner.
3.How do you turn a future amount into present value for a given yearly rate?
Present value = future amount / (1 + rate)^years.
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Sources (3)
- U.S. Office of Management and Budget: Circular A-4, Regulatory Analysis (2003; wirksam ab 1.1.2004), Archivfassung
- Folge 001 EconomyTutor.com, fakten.v4.json (f010: 1000 * 1,05^10 = 1.628,89)
- Eigene Berechnung: PV = FV / (1 + r)^t (jaehrlich, synthetische Saetze)
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Education only. Not financial advice.