Illustrate the concept of present value.

The Concept of Present Value:

While someone borrows money for a year, there the interest rate is the price, computed as a percentage of the amount borrowed, which charged by the lender.

The interest rate can be utilized to compare the value of a dollar realized nowadays along with the value of a dollar realized later, since this correctly measures the cost of delaying a dollar of benefit as well as the benefit of delaying a dollar of cost.

The present value of one dollar realized one year by currently is equal to $1/(1 + r): that is the amount of money you should lend out today sequentially to have $1 into one year. This is the value to you now of $1 realized one year by currently. The present value formula is equivalent to $1/(1 + r)N.

Whether the net present value of a project is present value of present and future benefits minus the current value of present and future costs.