Present value and Presentation currency: Difference between pages

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imported>Doug Williamson
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(PV).  
The currency in which financial statements are presented.


Today’s fair value of a future cash flow, calculated by discounting it appropriately.


The appropriate rate to discount with is the appropriately risk-adjusted current market [[cost of capital]].
==See also==
 
* [[Functional currency]]
 
==Calculation of present value==
 
We can calculate present value for time lags of single or multiple periods.
 
 
<span style="color:#4B0082">'''Example 1: One period at 10%'''</span>
 
If $110m is receivable one period from now, and the appropriate periodic cost of capital (r) for this level of risk is 10%,
 
the Present value is:
 
PV = $110m x 1.10<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
 
 
<span style="color:#4B0082">'''Example 2: One period at 6%'''</span>
 
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'''.
 
 
<span style="color:#4B0082">'''Example 3: Two periods at 6%'''</span>
 
Now let's change the timing from Example 2, while leaving everything else the same as before.
 
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.
 
 
== See also ==
* [[Adjusted present value]]
* [[Annuity factor]]
* [[Compounding factor]]
* [[Discount factor]]
* [[Discounted cash flow]]
* [[Economic value]]
* [[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 10:52, 26 November 2014

The currency in which financial statements are presented.


See also