CHAPTER 10Calculation 4: Present Value of a Future Cash Flow
What It Means
By now, you’re certainly familiar with the notion of an asset whose value increases over time because of the application of a compounding rate of growth. The most commonplace example is a savings account. You place a certain amount of money into the account; by the end of the first year, that money has grown because it has earned interest. By the end of the next year, that principal and interest combined earn more (compounded) interest, and so on. A similar process takes place when a piece of real estate appreciates in value over time.
When you find the present value of a future cash flow, you are running the compound interest process in reverse. You know, or at least ...