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Present Value Calculation

Simple Alliance, Kenya Limited


Present Value (PV)

In business finance, present value or discounted value is the present value of a stream of cash inflows or a future sum of money. Such future value of cash could be in form of fiscal obligations or earnings. To compute the PV figure, you need to base your calculations on a specific rate of return. You use a certain discount rate when doing present value calculations. To properly value future cash flows, you need to determine the suitable discount rate.  

Underlying Principle

While calculating the PV value, you are guided by the idea that cash received now has more value than money received at a later date.

Cash Received at the Present Time

Basically, the argument is that if you receive money now, say, KES 1,000, you could invest the money and make some profit. Alternatively, if you received the KES 1,000 next year, you will forego the chance to invest the money in the previous one year. You will not make profits. Your cash will be just 1,000.

Money Received Later 

The inverse holds true. This means that future cash disbursements would be more preferable to you than present payments. The idea is similar to the one for present cash receipts. If you pay out monies now, you miss out on the opportunity of investing such cash and deriving returns. Should you opt for future payment, you could invest the held cash and earn some returns.      

Rationale for PV Calculation

You would compute present value so as to use the results in making decisions about an array of business transactions. Your overriding idea is to quantify the fiscal returns you anticipate from a certain investment initiative.  In some instances, you could compare the projected returns of a number of possible investment options. This comparison helps you to identify the most viable or lucrative business venture. For instance, you could be considering investing in various ventures, namely:

  • New business premises
  • New equipment
  • Bonds
  • New business lines

 Approaches 

You could employ a number of methods to calculate present value figures.  One common technique involves using time value of money tables. These tables help you to calculate the present value of the cash inflows you expect from some investment.

Welcome Efficiency  

So as to make your investment decisions easier to make, we have developed a present value table for your use. The table is in the attached Rich Text Format (RTF) file.

File Description

The attached RTF file is compatible with majority of MS Word programs that are used within the Windows spectrum.  The tables in the file are however of Word 6.0 or 7.0 format. You need to note that certain MS Word programs could be unable to correctly render the tables. The file also offers examples of how you could use the PV tables.       

Using the Present Value Tables

To calculate the present value of some future investment, you can use the two present value tables. You can as well use the tables to compute present value of a string of projected investments.

Attachments

RTF Net Present Value Table for Calculating the Present Value of an Investment  

While contemplating making new investments, you could seek to establish the returns you anticipate from such investments. A common method of quantifying such future value is by using time value of money tables. You use the tables to calculate the present value of the cash inflows you anticipate from some investment.  We present you with RTF present value tables that could help you to quantify your expected returns from future investments. You could also use the tables compute the present value of a sequence of future investments. Your present value calculations will be made easier by the tables.

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