Which term describes the current worth of a future cash flow discounted at a given rate?

Which term describes the current worth of a future cash flow discounted at a given rate?

• A. present value
• B. future value
• C. net present value
• D. annuity value

Answer: (A)

Present value is the current worth of a future cash flow after discounting it at a specified rate, reflecting the time value of money. The idea is that money available today can be invested to earn a return, so a future dollar is worth less today. To find the present value of a future amount F due in n periods at rate r, you divide F by (1 + r)^n. For example, $100 received in one year with a 5% discount rate is worth about $95.24 today, because $95.24 invested at 5% would grow to $100 next year. The other terms don’t describe this concept: future value is how much today’s money will be worth in the future if invested; net present value is the sum of present values of multiple cash flows minus costs; and annuity value is the present value of a stream of equal payments.

Present value is the current worth of a future cash flow after discounting it at a specified rate, reflecting the time value of money. The idea is that money available today can be invested to earn a return, so a future dollar is worth less today. To find the present value of a future amount F due in n periods at rate r, you divide F by (1 + r)^n. For example, $100 received in one year with a 5% discount rate is worth about $95.24 today, because $95.24 invested at 5% would grow to $100 next year. The other terms don’t describe this concept: future value is how much today’s money will be worth in the future if invested; net present value is the sum of present values of multiple cash flows minus costs; and annuity value is the present value of a stream of equal payments.