Finding the present value, Financial Accounting

We have discussed the computation of the future value in the previous sections; here let us work the process in opposite. Let us assume you have won a lottery ticket worth Rs. 1000 and such Rs. 1000 is payable after three years. You should be interested in understanding the present value of Rs. 1000. Whether the interest rate is 10 percent, the present value can be computed by discounting Rs. 1000 to the present point of time as given below:

Value three years hence = Rs. 1000 (1/1.10)

Value one years hence = Rs. 1000 (1/1.10) (1/1.10)

Value now (Present Value) = Rs. 1000(1/1.10) (1/1.10) (1/1.10)

Formula

For compounding translates a value at individual point in time into a value at several future points in time. The opposite method translates future value in present value.  Discounting translates a value get back in time.  By the basic valuation equation

FV = PV (1 + k)n

Dividing both the sides by (1+k)n we find that

PV = FV [1/(1 + k)]n    ............................Eq(10)

The factor [1/(1 + k)]n is termed as the discounting factor or the present value interest factor [PVIFk,n]

Posted Date: 4/9/2013 2:37:03 AM | Location : United States







Related Discussions:- Finding the present value, Assignment Help, Ask Question on Finding the present value, Get Answer, Expert's Help, Finding the present value Discussions

Write discussion on Finding the present value
Your posts are moderated
Related Questions
How can we differentiate debit and credit

Q. Report on the management of foreign trade risks? Your company is probable to face three types of risk in connection with its foreign trade. These are as: (1) Foreign exch

Part A: The following information relates to Company A's defined benefit pension plan during the current fiscal year: Plan assets (beginning of the year) $400 (all number are in $m

A village ordered supplies for its Fire Department at an estimated cost of $16,700. The supplies were received with an invoice for $16,800. The village accepted the shipment and th

Fair value adjustment IFRS 3 requires that goodwill on consolidation should be based on the fair values of the net assets of the subsidiary company on the date of acquisition. T

The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm's stock price

Jaedan Industries has the following account balances as of December 31, 2010.  The firm's dividend payout ratio is 25% and the tax rate is 34%.  The firm's stock price on December

$in million Pepsi Coca cola Net cash provided by operating activities $6,796 $8,186 Average current liability 8,772 13,355 Average total liability 22,909 21,491

On December 31, 2014, Santana Company has $7,194,600 of short-term debt in the form of notes payable to Golden State Bank due in 2015. On January 28, 2015, Santana enters into a re

Q. Example on investment appraisal method ? Contribution per unit = 3·00 - 1·65 = $1·35 per unit Total annual contribution = 20000 × 1·35 = $27000 per year Annual cash fl