Present value

Definition

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return. It discounts future amounts to reflect their value in today's terms.

5 Must Know Facts For Your Next Test

1. Present value calculations often use geometric series to discount future cash flows.
2. The formula for present value, $PV = \frac{FV}{(1 + r)^n}$, aligns with the concept of convergent power series.
3. Understanding present value helps in evaluating the convergence and divergence within infinite series applications.
4. In calculus, integrating present value computations requires familiarity with exponential functions and their properties.
5. Power series expansions can be employed to approximate more complex present value calculations.

Review Questions

Related terms

Future Value: The amount of money an investment will grow to over a period at a specified interest rate.

Discount Rate: The interest rate used in discounted cash flow analysis to determine the present value of future cash flows.

Geometric Series:

$\sum_{n=0}^{\infty} ar^n$ represents a series with a constant ratio between successive terms, crucial for calculating present values.