Consider another set of net cash flows:   Year Cash flow 0 1,500 1 2,000 2 0 3 1,500 4 3,000 5 4,000     What is the net present value of the stream if the opportunity cost of capital is 11 percent?   What is the value of the stream at the end of year 5 if the cash flows are invested in an account that pays 11 percent annually?     What cash flows today (time 0), in lieu of the 2,000 cash flow, would be needed to accumulate $20,000 at the end of year 5? (assume that the cash flows for years 1 through 5 remain the same.)

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Present Value

Present value (PV) is defined as the current or present value of all future sums of cash flow or money at a specified rate of return. This rate of return is known as the discounted rate, which is essentially the interest rate, discounted over some time. The expected cash flows are discounted at a discount rate to compute the present value. The higher the discount rate, the higher the future value (FV), but the lower the present value.