### What is present value?

The present value is the value in today's dollars of an asset, benefit, or cost that will occur in the future. Perhaps the easiest way to think of a present value is to ask yourself how much you would be willing to accept to sell your rights to a future asset.

For example, is you were to plant an orange tree today you make expect to get \$50 worth of oranges in the future. Since you have to wait for the oranges (and their \$50 value), the value in today's dollars will be less. If someone is patient and the time they have to wait for the oranges is small, then their willingness to accept amount (the present value) may be \$45 or \$40. If the person is impatient or has to wait a long period of time, then the willingness to accept amount (the present value) may be much lower approaching \$5 or so.

The present value of a future payoff should never be larger than the face value of the payoff. This is a result of the idea of "discounting" which means that people tend to prefer having resources now rather than in the future. For example, imagine you were given the choice between:

A) \$1,000 today
or
B) \$1,000 one year from today

Everyone will probably choose A because they would rather have the money now. This tendency to prefer having things in the present is a result of people's time preference for resources. In economics, we can test someone's time preference by slightly altering the previous choice. We could ask someone to choose from:

A) \$1,000 today
or
B) \$1,100 one year from today

In this set up, people who choose option A have a strong time preference towards the present. Those who choose option B seem to take a longer view towards obtaining assets. For those people who are indifferent between the two choices, we could accurately say that the present value of \$1,100 one year from today is \$1,000 (because the person is indifferent between the two choices).

The present value is calculated using the discount rate. The discount quantifies the time preference that individuals have. For example, is someone is indifferent between having \$1,000 today or \$1,100 on year from today, we would say that their discount rate is equal to 10% because they require a minimum return of 10% in order to delay their decision.

Other posts on this site go through examples of how to calculate various present values with different discount rates and future values.
Spread the knowledge!
> >

#### 17 comments:

Jeffy on June 14, 2016 at 5:25 AM said...

Thank you for taking the time to provide us with your valuable information.

SEO Company in Chennai

Dhiya L on July 7, 2016 at 2:52 AM said...

I just stumbled upon your blog and wanted to say that I have really enjoyed reading your blog posts. Any way I’ll be subscribing to your feed and I hope you post again soon.

SAS Training in Chennai Mylapore

Nikshitha S on August 11, 2016 at 4:13 AM said...

Well Said, you have furnished the right information that will be useful to anyone at all time. Thanks for sharing your Ideas.
SAS Training in Chennai | SAS Course in Chennai

Rohit P on September 22, 2016 at 12:50 AM said...

That was an sensational information shared over here, nice to know them,

Thanks for share

World class seo training delivered from our experts digital marketing training in bangalore seo training in bangalore try reaching them out

manigandan busy on June 6, 2017 at 10:05 PM said...

Really an amazing post..! By reading your blog post i gained more information.
Bulk SMS Chennai
Internet Marketing Company Chennai

Website Design on July 31, 2017 at 1:20 AM said...

Best website desing for your business, magazine, portfolio,
ecommerce or personal blog websites.

Anoushka Sakthi on August 11, 2017 at 3:51 AM said...

Wonderful Blog!!! Your post is very informative about the latest technology. Thank you for sharing the article with us.

Digital Marketing Course in Chennai |
Digital Marketing Training

Scope Systems Infotech on September 9, 2017 at 4:34 AM said...

Nice to give informative blogs to us.Bigdata hadoop training in chennai

Robert Welain on November 27, 2017 at 2:13 AM said...

I think you should also read this article about present value definition.

Eva juna on December 22, 2017 at 8:54 PM said...

nice article
Windows 7 ultimativer Download

roja sun on February 1, 2018 at 2:04 AM said...

Thanks for sharing your article...Keep updating such a interesting Blog.
No.1 VLSI Project Center in Chennai | No.1 VLSI Project Center in Velachery

Gothai mal on February 2, 2018 at 1:37 AM said...

Really a superb post.you are developing lot of information from your post..Keep sharing your post..No.1 IOS Training Institute in Velachery | Best Android Training Institute in Velachery | Core Java Training Institute in Chennai

Sharma Ji on March 2, 2018 at 8:51 PM said...

Diploma in computer application
Thank you so much for such an amazing blog. I will share it with my fellow mates. I hope all these information would be helpful for them.

Unknown on March 4, 2018 at 11:19 PM said...

Thank you for sharing this valuable information.
SEO company in chennai
Digital marketing company in chennai
App marketing company in chennai
Social marketing company in chennai
SEO company in chennai

mibm global on March 5, 2018 at 12:49 AM said...

This is very good content you share on this blog. it's very informative and provide me future related information.
Online 1 year MBA

Himanshu Veerwal on March 5, 2018 at 9:20 PM said...

online certification courses
I just unearthed your blog and needed to state that I have truly appreciated perusing your blog entries. Any way I'll be buying in to your encourage and I trust you post again soon.

Vicky Ranawat on March 17, 2018 at 6:29 AM said...

Thanks for sharing this information I really enjoyed reading this article if you are looking for app developer, Hire App Developer from theunpluggedweb please visit us.

## I invite you to join dropbox!

Use the above link for an extra 250MB Free!
All content on this site is the copyright of webmaster. No re-posting is permitted. Powered by Blogger.

## Post Archive

| FreeEconHelp.com, Learning Economics... Solved! © 2009. All Rights Reserved | Template Style by My Blogger Tricks .com | Design by Brian Gardner Back To Top