In more detail
Money today can be invested and grow, so a future payment is worth less than the same amount now. Present value reverses Compound interest: PV = FV ÷ (1 + r)ⁿ, where FV is the future amount, r the yearly discount rate and n the number of years. Summing the present values of a series of cash flows and subtracting the initial cost gives the Net present value (NPV).
Why it matters
Present value lets you compare payments that arrive at different times on equal terms. It is used to price bonds, value pensions and annuities, judge whether a project is worth its cost and compare a lump sum with a stream of payments. The higher the discount rate, or the further away the payment, the lower its present value.
Example
1,000 received in 3 years, discounted at 5% a year, is worth 1,000 ÷ 1.05³ = 863.84 today. 10,000 received in 10 years at 6% is worth 5,583.95 today.
Common confusion
Present value is not the same as future value, which grows money forward, and it is not adjusted for inflation unless the discount rate includes it. The result depends heavily on the rate you pick, so show more than one.