PRESENT VALUE OF SINGLE CASH FLOW - Accounts and Finance for Managers

How do you Compute the Present value of a Single Cash Flow ?

It is the process in which the future value of single cash flow is reckoned to "0" time horizon i.e on today.

PVn = FVn /(1+R)n

Illustration

Find the present value of Rs.1,000 receivable 6 years hence if the rate of discount is 6 percent
PVn = Rs.1,000/(1+.06)6
= Rs.1,000(.705)
= Rs.705

Shorter Discounting Periods

  • The discounting may be frequent in times like intra year compounding, intra month compounding and so on.
  • Subject to

v Number of periods in the analysis- increases
v Discount rate applicable per period decreases

PRESENT VALUE OF SINGLE CASH FLOW

v M = number of times discounting
v K = Discount rate

Illustration

Consider the following cash inflow of Rs.10,000 at the end of four years. The present value of cash inflow when the discount rate is 12% and discounting quarterly.
PV = Rs.10,000 × (.623)=Rs.6,230


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