Present value of a lump sum - dcf technique, Finance Basics

Present Value of a Lump Sum - DCF Technique

Generally an investor would want to know how much he or she would stop currently to get a provided amount in year 1, 2, ... n.  In this condition he would have to decide at what rate of discount identified also as time preference rate, he or she will employ to discount the anticipated lump sum using this rate applying with the following formula as:

Pv = L / (1+K)n

Whereas:    Pv = Present value

                    L   = Lumpsum

                     K = Cost of finance or time preference rate

                     n = given year.

This implies there if the time preference rate is 10 percent the present value of 1/= to e obtained at the end of year 1 is as:

                   Pv = 1/1.1

                        = 0.909

Here value of inflows to be obtained in the 2nd year to Nth year, will be equivalent to as:

Pv = A / (1+K)n

Where:       A = annual cash flows

                   N = Number of years

The present value also of a shilling to be obtained at a given point in time can in addition to by the above formula is found with the present value tables.

Assume that an investor can expect to obtain as:

 40,000 at the end of year 2

 70,000 at the end of year 6

 100,000 at the end of year 8

Calculate his present (value) if his time preference is 12 percent.

Pv = L / (1+K)N

= 40,000 / (1.12)2 + 70,000 / (1.12)6 - 100,000 / (1.12)8

=  Kshs.107,740.26

With using tables like:

= 40,000(0.7992) + 70,000(0.5066) + 100,000(0.4039)

= 107,820

Posted Date: 1/31/2013 12:32:03 AM | Location : United States

Related Discussions:- Present value of a lump sum - dcf technique, Assignment Help, Ask Question on Present value of a lump sum - dcf technique, Get Answer, Expert's Help, Present value of a lump sum - dcf technique Discussions

Write discussion on Present value of a lump sum - dcf technique
Your posts are moderated
Related Questions
I have an assignment for my finance class. The company that i have FOR industry analysis is COSTCO WHOLESALES CORP THAT ITS STOCK IS IN DISCOUNT AND VARIETY StORES INDUSTRY. I need

Stone Container is a major producer of cardboard boxes. Stone Container has $10M in outstanding equity. In addition, it has $2M in outstanding debt. The debt is a ten-yearmortgage

Revenue Reserves - Retained Earnings These are undistributed earnings.  Those reserves are retained for the given reasons like: A. To create up for the fall in profits so a

Characteristics of sole proprietorship The main characteristics of sole proprietorships are as follows: 1) Ownership- The ownership of the business unit is by one person.

Executive Share Options Plans In a share option format, selected staff can be provided a number of share alternatives, each of which that provides the holder the right after a

Merchant Banks - Banking Institution Merchant Banks begun life as merchants and begun to control in financial firms, during the 19 th Century . The merchant banks act like a

You have the following information for Stardusts: Current EPS is $1.79.  The current dividend is $.68 per share.  The return on equity is 24%.  The present price is $49.22. a.

Suppose an entrepreneur owns a firm that has a production technology that generates the following revenue: R(e) = e 2 +100e where revenue depends on his effort level e. The monetar

what do you consider to be the main inbound logistics for banking

Sapp Trucking's balance sheet shows a total of noncallable $45 million long-term debt with a coupon rate of 7.00% and a yield to maturity of 6.00%. This debt currently has a marke