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Many people have difficulty comprehending the Present Value concept, because it differs from a notion most of us have, that it is better to have a given amount of money in the future than to use that money today. The hidden meaning from this is that a dollar received at some future time is more valuable than a dollar received today. From the previous chapter on Future Value, we now know that a dollar invested should increase in value tomorrow, thanks to the time value of money.


For investment purposes an amount of money available for investment today is more valuable to the investor than an equal amount that will not be available until some future time. This is because money available today can be invested to earn still more money, whereas money not yet received obviously cannot be invested today. As a result the Present Value of a given amount of money is more valuable than the same amount received at some future time.


To arrive at this Present Value amount, we reverse the future value concept. The reverse of interest compounding is called discounting.


For example if the Future Value of $1000.00 at 10 percent annual interest for 10 years is $2593.74, then we can also say that the Present Value of $2593.74 discounted at 10 percent for 10 years is $1000.00. In this case the interest rate is referred to as the discount rate.


Another way of defining the Present Value of an amount, would be the amount of money, that you would expect to receive at a specified time in the future, if you invested it today at a designated rate of return and allowed it to accumulate.