Present Value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.
Formula
Lump Sum:
PV = FV / (1 + r)^n
Annuity (Regular Payments):
PV = PMT * [1 - (1 + r)^-n] / r
Where:
- FV: Future Value
- PMT: Periodic Payment Amount
- r: Discount Rate (decimal)
- n: Number of Periods (Years)