What does "r" represent in the present value formula?

In the present value formula, "r" represents the discount rate. This rate is crucial as it accounts for the time value of money, which asserts that a certain amount of money today is worth more than the same amount in the future due to its potential earning capacity.

The discount rate reflects the opportunity cost of investing capital elsewhere and serves to adjust future cash flows to reflect their present value. When calculating the present value, future cash flows are multiplied by a factor that is determined using the discount rate, essentially reducing the value of cash flows expected in the future to their present worth. This helps investors and analysts make informed decisions comparing different investment opportunities.

Understanding that "r" is the discount rate allows for proper valuation in investment analysis and financial modeling, ensuring that future inflows are realistically assessed against their present-day equivalents.