ESG investment and Present value: Difference between pages

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Environmental Social and Governance-based investment.
(PV).  


An investment approach which takes explicit account of the environmental, social and corporate governance aspects of all proposed investments.
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]].
 
 
==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 ==
== See also ==
* [[Carbon footprint]]
* [[Adjusted present value]]
* [[Corporate engagement and shareholder action]]
* [[CertFMM]]
* [[Corporate governance]]
* [[Compounding factor]]
* [[Corporate social responsibility ]]
* [[Discount factor]]
* [[ESG integration]]
* [[Annuity factor]]
* [[ESG ratings]]
* [[Discounted cash flow]]
* [[I&E]]
* [[Future value]]
* [[Impact investing]]
* [[Internal rate of return]]
* [[Negative screening]]
* [[Intrinsic value]]
* [[Norms-based screening]]
* [[Net present value]]
* [[Positive screening]]
* [[Profitability index]]
* [[SRI]]
* [[Terminal value]]
* [[Sustainability]]
* [[Time value of money]]
* [[Sustainability themed investing]]


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

Revision as of 20:16, 15 January 2016

(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.


Calculation of present value

We can calculate present value for time lags of single or multiple periods.


Example 1: One period at 10%

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 1.10-1

= $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


Example 2: One period at 6%

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.


Example 3: Two periods at 6%

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 1.06-2

= $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