imported>Doug Williamson |
imported>Doug Williamson |
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| (PV).
| | Standard Setting Body. |
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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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| | == See also == |
| | * [[Standard]] |
| | * [[Standard Setting Body]] |
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| For example, if $110m is receivable one year from now, and the cost of capital (r) is 10% per year, the Present value is:
| | [[Category:Accounting,_tax_and_regulation]] |
| | | [[Category:The_business_context]] |
| PV = $110m x 1.1<sup>-1</sup>
| | [[Category:Identify_and_assess_risks]] |
| | | [[Category:Manage_risks]] |
| = $100m.
| | [[Category:Risk_frameworks]] |
| | | [[Category:Risk_reporting]] |
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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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| '''''Examples'''''
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| For example, if $10m is receivable one year from now, and the cost of capital (r) is 6% per year, 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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| 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:
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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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| * [[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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| * [[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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