In one sentenceWhat an amount you will receive or pay in the future is worth today, after discounting it at a rate that reflects the return that could have been earned over the same period.
Simply put
A riyal you receive in two years is worth less than a riyal in your hand today, because if you had it now you would invest it. Present value brings future amounts back to today's date so you can compare them fairly.
It is the basis for comparing financing and lease offers and feasibility studies: the best option is the one with the lowest present cost, not the lowest total you pay.
Worked example
A customer offered a supplier to pay him 121,000 SAR in two years instead of paying today, and the supplier can earn 10% a year on his money in his business.
Future amount121,000 SAR
Discount factor for two years(1.10)^2 = 1.21
Present value = 121,000 ÷ 1.21100,000 SAR
Formula: Future amount ÷ (1 + discount rate)^number of periods
Don't confuse it with
Net present valueIt adds up the present values of all the project's cash flows and then subtracts the initial cost, while present value is for a single amount or a series of amounts.