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Present Value

Present Value

Definition

The value today of a future payment, or payments, discounted at an appropriate interest rate. Given the time value of money, the present value of $1 today is greater than the present value of $1 a year from today. Due to the earning power of funds on hand compared to funds received in the future, delaying loss and/or premium payments generates cash flow and increases the present value of funds held. Present value analysis can be used for a variety of purposes including (1) calculating loss funding needs for risk retention programs and (2) comparing risk financing alternatives having different loss and premium payment streams.

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