Question

what does present value really tell us ? if the discount rate is higher why would the pv be lower ?

Answer 1

Solution

Present value is the current value as on date of future cashflow or straem of cashflows at a given discount rate or required rate of return.Basically the present value takes into account the value of money ,had the money ben invested at the discount rate of rate of return.Thus present value teels us as to how much money is needed today to earn a specific future sum

Formula for present value=Future cashflow/(1+r)^n

where

r-discount rate

n-number of periods

Thus as it can be seen from the formula,as the discount rate increases,the present value decreases.Thiss means that when the required rate of return is more the present value for a future sum will be lesser.