Present value (PV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Discounting future cash flows to their present value allows you to compare alternative investments and make sound financial decisions.
Understanding present value calculation is critical in various financial scenarios. For instance, by calculating the present value of future returns, you can evaluate the potential profitability of an investment or compare the value of different investment options with varying cash flow patterns. Historically, the concept of present value traces back to the 18th century, with notable contributions from economists like Irving Fisher and John Maynard Keynes.