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What is present value?

What is present value?

The price in today's dollars for an asset which will appreciate or depreciate to an amount which may be known at a specific date in the future.

One simple example of Present Value is the amount that needs to be invested in order to grow to a specific amount later, if the rate of return and length of time are known. So if someone wanted to have $50,000 to buy a boat in 5 years, and they could get 5% on a guaranteed investment, they would need a lump sum investment of about $39,000 to get them there.

That $39,000 is the Present Value of the $50,000. The $39,000 will turn into the $50,000, so it's like buying that boat at a discount. The rate of return is referred to as the Discount Rate when things are viewed from future values and discounted backward.

This explanation is a little oversimplified, but it will get you going in the right direction.

What is Future Value?
What is Market Value?

Keywords: discount rate, future value, discounting, total return, depreciation, present value, time value of money,