What is the present value of £100 to be received in five years’ time if the discount rate is 2%?

This would be P0 = £100/(1 + 0.02)

5 = £90.57. This shows that £100 in five years’ time is worth £90.57 in today’s money terms. Such present value calculations underpin most of the valuation models employed in finance as the situation is that investors purchase assets now and receive cashflows in the future, which then need to be converted into today’s terms (i.e., discounted back to the present) so that the amount to be paid for the asset now and the amount received in the future can be compared in equivalent terms.