Payable through draft and Present value: Difference between pages

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(PTD). A draft that is only payable via a nominated bank.  
(PV).  
 
Today’s fair value of a future cash flow, calculated by discounting the future cash flow at the appropriately risk adjusted current market [[cost of capital]].
 
 
For example, if $110m is receivable one year from now, and the cost of capital (r) is 10% per year, the Present value is:
 
PV = $110m x 1.1<sup>-1</sup>
 
= $100m.
 
 
And more generally:
 
PV = [[Future value]] x [[Discount factor]] (DF)
 
Where:
 
DF = (1+r)<sup>-n</sup>
 
:r = cost of capital per period; ''and''
:n = number of periods
 
 
===Examples===
 
For example, if $10m is receivable one year from now, and the cost of capital (r) is 6% per year, the Present value is:
 
PV = $10m x 1.06<sup>-1</sup>
 
= '''$9.43m'''.
 
 
 
Now changing the timing in this example, if exactly the same amount of $10m is receivable but later, namely two years from now, and the cost of capital (r) is still 6% per year, the Present value falls to:
 
PV = $10m x 1.06<sup>-2</sup>
 
= '''$8.90m'''.
 
 
The longer the time lag before we receive our money, the less valuable the promise is today.
 
This is reflected in the lower Present value for the two years maturity cash flow of $8.90m, compared with $9.43m Present value for the cash flow receivable after only one year's delay.


Depending on the conditions attached to the draft, the nominated bank may be the paying bank or only act as the collecting bank that presents the draft for payment.


== See also ==
== See also ==
* [[Draft]]
* [[Adjusted present value]]
* [[CertFMM]]
* [[Compounding factor]]
* [[Discount factor]]
* [[Annuity factor]]
* [[Discounted cash flow]]
* [[Future value]]
* [[Internal rate of return]]
* [[Intrinsic value]]
* [[Net present value]]
* [[Profitability index]]
* [[Terminal value]]
* [[Time value of money]]


[[Category:Corporate_finance]]
[[Category:Long_term_funding]]
[[Category:Manage_risks]]
[[Category:Trade_finance]]

Revision as of 14:40, 1 November 2014

(PV).

Today’s fair value of a future cash flow, calculated by discounting the future cash flow at the appropriately risk adjusted current market cost of capital.


For example, if $110m is receivable one year from now, and the cost of capital (r) is 10% per year, the Present value is:

PV = $110m x 1.1-1

= $100m.


And more generally:

PV = Future value x Discount factor (DF)

Where:

DF = (1+r)-n

r = cost of capital per period; and
n = number of periods


Examples

For example, if $10m is receivable one year from now, and the cost of capital (r) is 6% per year, the Present value is:

PV = $10m x 1.06-1

= $9.43m.


Now changing the timing in this example, if exactly the same amount of $10m is receivable but later, namely two years from now, and the cost of capital (r) is still 6% per year, the Present value falls to:

PV = $10m x 1.06-2

= $8.90m.


The longer the time lag before we receive our money, the less valuable the promise is today.

This is reflected in the lower Present value for the two years maturity cash flow of $8.90m, compared with $9.43m Present value for the cash flow receivable after only one year's delay.


See also