What does the present value (PV) formula compute?

The present value (PV) formula computes the current value of future cash flows by discounting them at a specific interest rate. It is a fundamental concept in finance that allows analysts and investors to determine how much a series of future cash flows is worth today. This is particularly useful when comparing investment opportunities or calculating the value of financial products that provide returns over time, as it accounts for the time value of money—the principle that a dollar today is worth more than a dollar in the future due to its potential earning capacity.

In essence, the PV formula takes into consideration the amount of time until those future cash flows will be received and the discount rate, which reflects the opportunity cost of capital or the risk associated with the cash flows. By converting future amounts to their present value, it allows for a more accurate evaluation of investments and financial decisions.