present value

noun

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

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 At prices averaging $1,300 per ounce, those projections jump to a 26 percent return and a net present value of $239 million. Author: Elwood Brehmer, Anchorage Daily News, "Interior gold mine gets new life, $100M expansion," 17 June 2018 Next on that list is last year's top pick, Hall, who has an easy delivery, as well as three pitches with present value and projection to dream on. Jon Meoli, baltimoresun.com, "Orioles set blueprint for rebuild during MLB draft, filling needs for pitching upside, infielder," 5 June 2018 Sprint and T-Mobile expect the deal to bring cost synergies with a net present value of more than $43 billion. Jacky Wong, WSJ, "SoftBank Chairman Makes Costly Flip-Flop in Sprint-T-Mobile Deal," 30 Apr. 2018 But the net present value that shareholders would recover from the investment-banking division could be roughly €15bn. The Economist, "Should one of the world’s largest banks be wound down?," 19 Apr. 2018 O'Day also signed after the 2015 season to a four-year, $31 million deal with $1 million deferred and paid beginning in 2020, knocking his $9 million 2018 salary down to $8 million in present value. Jon Meoli, baltimoresun.com, "Don't buy sticker price: Orioles' use of deferred money in contracts helped land Cobb," 22 Mar. 2018 This is done under a concept known as net present value, which essentially boils down a whole bunch of numbers involving decades of costs or benefits into one big number. Glenn Kessler, Washington Post, "Does President Trump’s border wall pay for itself?," 16 Mar. 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

4 Sep 2018

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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

noun

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

Where:
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

More from Merriam-Webster on present value

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