Which statement is TRUE about Present Value(PV)?

Question

Options

• AThe difference in benefit received between a chosen project and a project that was not chosen
• BThe interest rate that makes the net present value of all cash flow equal zero
• CThe value today of future cash flow
• DThe present value of cash inflow less the present value of cash outflow

• A
  3% (1)
• B
  10% (4)
• C
  80% (32)
• D
  8% (3)

Explanation

Present Value (PV) is defined as the value today of a future cash flow - option C is correct because PV answers the question: "How much is a future sum of money worth right now, given a specific discount rate?"

Why the distractors are wrong:

• A describes opportunity cost (or more precisely, the concept behind economic profit/loss from forgoing an alternative).
• B describes the Internal Rate of Return (IRR) - the discount rate that zeroes out NPV.
• D describes Net Present Value (NPV) - PV of inflows minus PV of outflows.

Memory tip: Think of PV as a time machine for money - it brings a future dollar back to today. NPV goes one step further by subtracting what you paid (costs), and IRR is the "break-even" rate that makes NPV exactly zero.

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