imported>Doug Williamson |
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| (PV).
| | == Summary == |
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| 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]].
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| ==Calculation of present value== | |
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| We can calculate present value for time lags of single or multiple periods.
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| <span style="color:#4B0082">'''Example 1: One period at 10%'''</span>
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| If $110m is receivable one period from now, and the appropriate periodic cost of capital (r) for this level of risk is 10%,
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| the Present value is:
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| PV = $110m x 1.10<sup>-1</sup>
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| = '''$100m'''.
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| And more generally:
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| PV = Future value x Discount factor (DF)
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| Where:
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| DF = (1 + r)<sup>-n</sup>
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| :r = cost of capital per period; ''and''
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| :n = number of periods
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| <span style="color:#4B0082">'''Example 2: One period at 6%'''</span>
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| If $10m is receivable one year from now, and the cost of capital (r) is 6% per year,
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| the Present value is:
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| PV = $10m x 1.06<sup>-1</sup>
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| = '''$9.43m'''.
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| <span style="color:#4B0082">'''Example 3: Two periods at 6%'''</span>
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| Now let's change the timing from Example 2, while leaving everything else the same as before.
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| If exactly the same amount of $10m is receivable, but later, namely two years from now,
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| and the cost of capital (r) is still 6% per year,
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| the Present value falls to:
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| PV = $10m x 1.06<sup>-2</sup>
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| = '''$8.90m'''.
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| The longer the time lag before we receive our money, the less valuable the promise is today.
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| 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.
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| == See also ==
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| * [[Adjusted present value]]
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| * [[CertFMM]]
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| * [[Compounding factor]]
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| * [[Discount factor]]
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| * [[Annuity factor]]
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| * [[Discounted cash flow]]
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| * [[Future value]]
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| * [[Internal rate of return]]
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| * [[Intrinsic value]]
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| * [[Net present value]]
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| * [[Profitability index]]
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| * [[Terminal value]]
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| * [[Time value of money]]
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| [[Category:Corporate_finance]]
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| [[Category:Long_term_funding]]
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| [[Category:Manage_risks]]
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| [[Category:Trade_finance]]
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