Present value / Present value of money

The present value is the current value of a sum of money available or due at some future date.

It is easy to see that it does not matter whether a certain amount is available today or only in a year's time. If all other circumstances are otherwise the same, everyone will obviously be happier if they receive the amount in question today than in a year, since they can invest it in the meantime. It follows that the same amount of money is more valuable today than tomorrow (or at any later date).

If we realize this, then we have actually realized that money has a so-called time value. It also follows that two sums of money available or due at different times cannot be simply added or subtracted from each other. 

In order to be able to compare (add or subtract) the amounts of money available at different times, their value must be calculated for a common time. The present value calculation helps in this, which determines the present value of sums of money due at different times on an imaginary time line.

The present value is therefore nothing but the value of the amount of money available at any time in the future calculated as of today. Calculating the present value with discounting is happening. 

The various investment, investment for an investor or entrepreneur considering options, the present value calculation provides assistance in deciding which one should be chosen. All investment and investment opportunities mean expenses and bring income at different times. 

The starting point is the individual investment and investment alternatives cash-flow. With the help of the present value calculation, the value of the sums of money due at different future dates can be converted to today's date and then aggregated. Based on this, you can already decide which option is more profitable. The greater its present value, i.e. the (net) present value of an investment, the more valuable and profitable the investment.