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Definition

The current value of a future sum of money or stream of incomes. Thus if you are looking at a share and after some analysis you decide that it will pay a dividend of 100c in a year's time, then you will need to discount that future income into today's money to see what it is worth to you now. Clearly it must be worth less than 100c because of inflation and the opportunity cost of your 100c. For simplicity's sake let us assume that you are willing to pay 80c now for that dividend of 100c that you will only get one year from now. If you forecast that the dividend after that, which you will only get in two years, is likely to be 120c then you must again decide what that is worth in today's money - say you are willing to pay 75c for that. If you continue this process forward a number of years you can add up your discounted flow of future dividends and work out what the share is worth to you now. That is its net present value - to you. Any future income can be reduced to a net present value in this way.

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