Q. What do you mean by Present Value of a Future Sum?
The present value of a future sum will be worth less than the future sum because one foregoes the opportunity to invest and thus foregoes the opportunity to earn interest during that period. Expectation of receiving the money in future means that the money is not available presently and therefore one has to forego the interest which could be earned, had the money been available now. This also makes a person to loose the opportunities to get reward/return in terms of interest earnings on that investment. This interest foregone is the cost to the investor and the future expected money. Must be adjusted for this cost. As the length of time for which one has to wait for the future money increases, the cost attached to delay also increases reflecting the compounded value of the lost opportunities. In order to find out the PV of future money, this opportunity cost of the money is to be deducted from the future money.