Present Value (PV)
Present value calculations are widely used to assign values to corporations, bonds, or financial securities. It also helps investors make comparisons between investment decisions that have different cash flows coming in at different times. Present value calculations account for the time value of money as well as inherent investment risks.
Present value is used to determine how much a set of future cash flows are worth today. To put it simply, an investor you would be indifferent between holding $100 in cash (present value of $100 today is $100) and a bond that pays off next year but has a present value of $100.
Calculating the present value of a set of cash flows is rather straightforward. The present value is equal to the sum each future cash flow divided by the appropriate discount rate.
An example will help clarify this. Assume you have a cash flow that will pay you $100 in exactly one year with 100% certainty. Since there is no uncertainty about the payments or cash flows, and thus no risk involved, the appropriate discount rate is simply the risk free rate. For this example assume it is 10%. The present value is then simply $100 / (1+0.1) = $90.91