Present Value (PV) calculates what a future sum of money is worth today, given a discount rate. It answers: "How much do I need to invest today to have $X in the future?" It is the inverse of future value and the cornerstone of financial valuation.
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Pro Tip
The discount rate you use dramatically changes the result. For personal planning, use your expected investment return. For business decisions, use the Weighted Average Cost of Capital (WACC).
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Did You Know?
A lottery winner who wins $1 million paid over 20 years is actually receiving far less than $1 million in present value. At a 5% discount rate, 20 annual payments of $50,000 have a present value of only about $623,000.
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