How To Calculate Present Value
Where can the value for the discount factor be found?
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Hi, my name is Grant Hobson. I have been a finance analyst for the last six years. Today I am going to run you through some financial performance methods as well as some investment and payroll techniques. How to calculte present value. Present value is another technique where we discount future cash flows so that we know in today's value what the future value is. For example, in explaining the time value of money, we know that if we invest a hundred pounds today at five percent per year, in one year we will generate, we will receive a hundred and five pounds back which is simply the interest times by your initial investment. Now in terms of present value, we might want to know if you have got a family member, say he wants to give you some money. He wants to either give you a hundred pounds now, or say I will give you a hundred and two pounds, a hundred and five pounds in a year's time. You know that may be you can invest your hundred pounds if you get it now and get a ten percent rate, you want to decide whether it is beneficial for you to take a hundred pounds now or get it in a year's time. So if you look at the present value, the calculation would simply be, in one year's time, you get your hundred and five pounds times by your discount factor which would be not point nine of nine. This discount factor is taken from the present value tables which are available online and in any study text that you are looking at so you can use that alternatively, you can use a discount factor formula which you can see is one divided by one plus r to n where r is your interest rate and n is your time period. So your present value there would be ninety five pounds forty five pence. So rather than take a hundred pounds, a hundred and five pounds in a year's time, you will rather take your hundred pounds now because this money is worth more to you and you can do more productive things with your investment and that pretty much sums the present value calculation.