You can buy property today for $2.3 million and sell it in 6 years for $3.3 million. (You earn no rental income on the property.) If the interest rate is 9%, what is the present value of the sales price? Formula PV = C / (1 + r)n PV = 3.3 / (1 + 9%)6 PV = 3.3 / (1.09)6 PV = 1,967,682.18 Is the property investment attractive to you? I am paying 2.3 million for the property and it is currently worth 1.9 million. I don’t care for paying more for what it is currently worth today.  However, if I kept the land for 6 years, I could sell it for 3.3 million.  That would be a net profit of 1 million.  Yes, it is attractive to me. What is the present value of the future cash flows, if you also could earn $130,000 per year rent on the property? The rent is paid at the end of each year. Formula: FVn = C x (1 + r)n FVn = 130k x (1.09)6 FVn = 218,023.01 + 780,000 (130 x 6 years) FVn = 998,023.01 additional 998,023.01 + 3,300,000 = 4,298,023.01 Is the property investment attractive to you now?

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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.