Núvæðagildi

Núvæðagildi is an Icelandic term that translates to "present value" in English, a fundamental concept in finance. It refers to the current worth of a future sum of money or stream of cash flows, given a specified rate of return. This rate of return is often referred to as the discount rate, and it represents the opportunity cost of capital or the interest rate that could be earned on an investment with similar risk.

The core idea behind present value is that money available at the present time is worth more than the same amount in the future due to its potential earning capacity. In other words, a dollar today is worth more than a dollar tomorrow because you can invest today's dollar and earn interest on it. Calculating present value involves discounting future cash flows back to the present using the discount rate.

This concept is crucial for making informed financial decisions, such as evaluating investment opportunities, determining the fair price of assets, and assessing loan repayments. For instance, when a company considers a project that will generate cash flows over several years, it will use the present value calculation to determine if the future earnings are worth the initial investment today. Similarly, investors use present value to compare different investment options with varying payout schedules. The higher the discount rate, the lower the present value of future cash flows, reflecting a greater perceived risk or a higher opportunity cost.