The present value of cash flows is a calculation that determines the current worth of future cash flows, using a discount rate to account for the time value of money. For instance, if you expect to receive $1,000 in one year, the present value of that cash flow might be $920 if the discount rate is 8%.
Calculating present value is critical for making informed financial decisions, as it allows for the comparison of cash flows occurring at different times. It is applied in various contexts, including investment analysis, project evaluation, and financial planning.