Overview

Main Menu Name: Pr. Value

Calculates the present value of annual cash flows from an investment and the cumulative present value based on all cash flows during the life of the investment. The screen illustrates up to 50years of cash flows.

In this article:

• Background
• Why should I use this calculator?
• Getting Started
• Entering Data
• Results

Background

Present value computations provide quantitative techniques for determining the impact of time on financial decision making. The present value concept is essential in understanding the effect of time on the profitability of an investment, how the projected value of an investment's future economic returns affects the price that should be paid for it now, and how to compute the value of an investment's future economic return.

Investment, by definition, implies a delay in consumption or enjoyment. There must be some compensating reward for an individual to forego current consumption or enjoyment in favor of future consumption. That "profit" must be large enough to justify (at least in the mind of the investor) the expected delay. The measure of the profit is typically called the "rate of return" or the "rate of interest."

Why should I use this calculator?

To decide if a given investment meets minimum criteria for acceptability in terms of present value. If the present value is too low relative to the price, the investment may be unattractive.

To compare two or more investments based on projected cash flows. The investment with the greatest present value will generally provide the highest overall rate of return.

Getting Started

Present value computations provide quantitative techniques for determining the impact of time on financial decision making. The present value concept is essential in understanding the effect of time on the profitability of an investment, how the projected value of an investment's future economic returns affects the price that should be paid for it now, and how to compute the value o fan investment's future economic return.

Investment, by definition, implies a delay in consumption or enjoyment. There must be some compensating reward for an individual to forego current consumption or enjoyment in favor of future consumption. That "profit" must be large enough to justify (at least in the mind of the investor) the expected delay. The measure of the profit is typically called the "rate of return" or the "rate of interest."

Entering Data

1. Discount Rate:  Enter the discount (interest) rate.
2. Income:  Enter the series of annual cash flows from the investment.

Results

The bottom panel shows the annual present value of each year's expected cash flow. It also calculates the annual discounted cash flow to show (as of the current year) the cumulative present value for the indicated investment period.