Introduction to Present Value

Present Value of $1 must be less than $1 tomorrow because a $1 today can be invested, etc. Discount Factor - present value of a delayed payoff may be found by multiplying payoff by a discount factor.

Present Value = Discount Factor x Payoff

Discount Factor = 1 (divided by) Rate of Return

Opportunity Cost - rate of return offered by equivalent investment alternatives in capital market.

Net Present Value - Present Value less Required Investment