present value


Definition of present value

: the sum of money which if invested now at a given rate of compound interest will accumulate exactly to a specified amount at a specified future date

Examples of present value in a Sentence

Recent Examples on the Web

Interested buyers need to match or exceed the property’s present value, which is roughly $2.5 million. Jon Chesto,, "Hidden stretch of East Boston waterfront draws developer’s interest," 15 July 2019 It's been widely reported that Villa intend to do the same with Tyrone Mings, but with Bournemouth pricing the 26-year-old at £15m some questions need to be asked whether a permanent move presents value for money., "Tyrone Mings: Aston Villa Must Not Gamble on Signing Injury Prone Defender," 6 July 2019 The equations of quantum dynamics allow physicists to predict the future values of the wave function, given its present value. Quanta Magazine, "Einstein’s Parable of Quantum Insanity," 10 Sep. 2015 Kinross estimates the Gilmore project will generate a 17 percent internal rate of return with a net present value of $130 million and cash flow of $240 million, assuming an average gold price of $1,200 per ounce. Author: Elwood Brehmer, Anchorage Daily News, "Interior gold mine gets new life, $100M expansion," 17 June 2018 Official projections put the present value of these two unfunded liabilities at $50 trillion over the next 75 years. Steve H. Hanke And Stephen J.k. Walters, WSJ, "Lying Prices Keep America Hooked on Spending," 7 Jan. 2019 At age 30, after one year of service, the employee has a benefit of $500 ($50,000 x 1% x 1) per year payable at 65 which creates a liability present value of about $1,500. WSJ, "Who’s to Blame for Underfunded Pensions?," 30 July 2018 Savvy appraisers know that the present value of an average solar system now adds more value to the home than the cost of the system. WSJ, "Sun Smiles if You Can Pay the Up-Front Cost," 15 May 2018 Under the prior law, a company making a $100 renovation could deduct the costs over 15 years, for a deduction equal to a present value of $84.38, according to a Tax Foundation analysis. Richard Rubin, WSJ, "Four Words Missing in the New Tax Law Give Restaurants Heartburn," 10 July 2018

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'present value.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

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First Known Use of present value

1831, in the meaning defined above

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Last Updated

24 Jul 2019

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The first known use of present value was in 1831

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More Definitions for present value

present value


Financial Definition of present value

What It Is

Present value describes how much a future sum of money is worth today.

How It Works

The formula for present value is:

PV = CF/(1+r)n

CF = cash flow in future period
r = the periodic rate of return or interest (also called the discount rate or the required rate of return)
n = number of periods

Let's look at an example. Assume that you would like to put money in an account today to make sure your child has enough money in 10 years to buy a car. If you would like to give your child $10,000 in 10 years, and you know you can get 5% interest per year from a savings account during that time, how much should you put in the account now? The present value formula tells us:

PV = $10,000/ (1 + .05)10 = $6,139.13

Thus, $6,139.13 will be worth $10,000 in 10 years if you can earn 5% each year. In other words, the present value of $10,000 in this scenario is $6,139.13.

It is important to note that the three most influential components of present value are time, expected rate of return, and the size of the future cash flow. To account for inflation in the calculation, investors should use the real interest rate (nominal interest rate - inflation rate). If given enough time, small changes in these components can have significant effects.

Why It Matters

The concept of present value is one of the most fundamental and pervasive in the world of finance. It is the basis for stock pricing, bond pricing, financial modeling, banking, insurance, pension fund valuation, and even lottery payouts. It accounts for the fact that money we receive today can be invested today to earn a return. In other words, present value accounts for the time value of money.

In the stock world, calculating present value can be a complex, inexact process that incorporates assumptions regarding short and long-term growth rates, capital expenditures, return requirements, and many other factors. Naturally, such variables are impossible to predict with perfect precision. Regardless, present value provides an estimate of what we should spend today (e.g., what price we should pay) to have an investment worth a certain amount of money at a specific point in the future -- this is the basic premise of the math behind most stock- and bond-pricing models.

Present value is one of the most important concepts in finance. Luckily, it's easy to calculate once you know a few tricks. Click here to learn How to Calculate Present Value Using Excel or a Financial Calculator.

Source: Investing Answers

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