Time value of money

Why a rupee today is worth more than a rupee tomorrow

Money available now can be invested to earn a return, so its present value is always higher than the same amount received later. This idea underlies almost every valuation method in finance, from bond pricing to company valuation.

Discounting a single future cash flow

To bring a future amount back to today's terms, divide it by (1 + r)ⁿ, where r is the discount rate and n is the number of periods.

Worked example: ₹1,000 received in 3 years, at a 10% discount rate: PV = 1000 / (1.10)³ = ₹751

The higher the discount rate, the less that future cash flow is worth today.

Annuities: valuing a stream of equal payments

An annuity is a series of equal cash flows paid at regular intervals. Its present value equals the sum of each payment's individually discounted value, which simplifies into one clean formula worth memorizing before exams.