Present value and its value

such a thing as the present value exists not only to address students' economic problems, but also for conducting real business.It helps evaluate the profitability of investments, the payback period of investments or projects.Each head of the company must be clear cash flows, the cost and the impact of inflation, default and other economic metamorphosis.


Present value - this means that are necessary today for the specified amount in the future, under the given conditions.To better understand this, we can give you an example.Suppose that after five years the company wants to get from their investments in the amount of $ 100,000.Terms contribution imply capitalization funds at 10% of profits.Thus, the present value of the required amount to date of about $ 18,200.This means that you need right now to invest in the project $ 18,200 to 5 years receive $ 100,000.


Present value is determined by the following formula:

PV = FV / (1 + i) t,

where PV - the present value;

FV - the amount that investors expect to receive;

i - the interest rate investments;

t - the duration of investments.

The formula is very simple, and if necessary, you can find out the amount to be received by the company in the future with the available means:

FV = PV * (1 + i) t


use this knowledge can not only to determine the required amount,but also to calculate the expected profits.For this purpose, net present value, which shows the amount of income minus investment.Using this figure, you can see the payback period.This is especially true when large amounts, it is always important to know how quickly this amount begins to generate income.Present value helps analyze the profitability of investments, as well as to select projects where the investment will pay off more quickly in the allotted period of time.

Present value may also help to recalculate receivables and payables.It is well known that inflation leads to depreciation of money, and thus, when the purchasing power of delay in payment of the debt is reduced.It should be taken into account when calculating with suppliers and banks.For this reason, many companies prefer to sign long-term contracts on credit terms.This approach allows them to buy raw materials and products "at the old prices."If these transactions are carried out on large sums of money, the savings are simply tremendous.

should also take this into account and in carrying out activities as a supplier or distributor.At the conclusion of contracts necessary to provide for inflation and impose additional amount of interest in case of delay of payment.Weighted economic approach will help companies to anticipate any possible complications in the calculation, as well as to invest the most profitable way.