What is the value in today's prices, of a future cash flow?

• A. Quartiles
• B. Present value
• C. Normal distribution
• D. Inter-quartile range

Answer: (B)

This question hinges on the time value of money: money today is worth more than the same amount received in the future because it can be invested and earn a return. The value in today’s prices of a future cash flow is the present value. You discount the future amount back to today using a rate that reflects the return you could earn or the cost of capital. For a single future cash flow in t periods at rate r, present value equals the future amount divided by (1 + r) raised to the t power. This gives you the amount that would need to be invested today to generate that future cash flow, making it the right way to compare cash flows occurring at different times.

The other terms come from statistics rather than finance: quartiles and interquartile range describe distribution spread, and the normal distribution is a statistical model of how values are spread. They don’t tell you how much a future cash flow is worth today.