Present value (PV) is the capitalised value of a stream of future costs or benefits. It enables the cost and revenue streams of different options to be put on to a comparable footing by expressing them in terms of their present value. For example, having an income of £1000 per year for 4 years is the same as having £3802 now because if you invested the £3802 now at 3½% interest over the 4 years you would receive £4000. This is because as time passes, in real terms, each £1 becomes worth less.
Net present value (NPV) describes the net value of a stream of costs and a stream of benefits ie the balancing value when the present value of the costs are subtracted from the present value of the benefits.
Calculations are based on a discount factor (currently set at 3½%) which is considered to represent the amount of worth each £1 reduces over a year. HM Treasury publishes the discount rate - see the WLC Model supporting material for more information.
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