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Present Value: A Comprehensive Guide to Its Legal Definition and Applications
Definition & Meaning
Present value (PV) refers to the current worth of a sum of money that is expected to be received or paid in the future. The principle behind present value is that money available today is more valuable than the same amount received in the future due to its potential earning capacity. For instance, if you invest one hundred dollars at a 10 percent annual return, it will grow to one hundred ten dollars in a year. Conversely, if you are to receive one hundred dollars a year from now, its present value today is approximately ninety dollars and ninety-one cents, calculated by dividing one hundred by one point one.
The present value formula is:
PV = FV (1 + dr)"n
In this formula, PV is the present value, FV is the future value, dr is the discount rate, and n is the number of years until the future value is received.
Table of content
Legal Use & context
Present value calculations are commonly used in various legal and financial contexts, including:
Valuing properties or investments based on expected future cash flows.
Determining the worth of a business during acquisition negotiations.
Assessing damages in personal injury cases where future earnings are lost.
Legal professionals may use present value calculations to evaluate settlements or negotiate terms in contracts. Users can utilize legal templates from US Legal Forms to assist in these calculations.
Key legal elements
Real-world examples
Here are a couple of examples of abatement:
Example 1 (hypothetical example): An investor expects to receive $10,000 in five years. If the discount rate is 5 percent, the present value is:
PV = $10,000 (1 + 0.05)"5 = $7,835.26
Example 2: A business is projected to generate cash flows of $20,000 annually for three years. If the discount rate is 8 percent, the present value of these cash flows can be calculated for each year and summed up to determine the total present value.
Comparison with related terms
Term
Definition
Difference
Future Value (FV)
The amount of money expected in the future.
Future value calculates the worth of money at a future date, while present value determines its worth today.
Discount Rate
The interest rate used to discount future cash flows.
While present value uses a discount rate to find current worth, the discount rate itself is not a value but rather a percentage.
Common misunderstandings
What to do if this term applies to you
If you need to calculate present value for an investment or legal matter, consider the following steps:
Identify the future cash flows and the appropriate discount rate.
Use the present value formula to perform your calculations.
For complex situations, consult a financial advisor or legal professional.
Explore US Legal Forms for templates that can assist with your calculations.
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