Discounted value and its value

Business

Such a concept as a discounted valueexists not only to solve student economic problems, but also to conduct real commercial activities. It helps to assess the profitability of investments, the payback period of investments or projects. Each head of the company must clearly represent the movement of money, its value and the impact of inflation, default and other economic metamorphosis.

present value
Definition

Discounted value is a means,which are necessary for today to receive this amount in the future under given conditions. In order to better understand this, you can give an example. Suppose that in five years the company wants to receive from its investments an amount of $ 100,000. Deposit terms mean the capitalization of funds at 10% of profit. Thus, the present value of the required amount for today will be about $ 18,200. This means that now it is necessary to invest $ 18200 into this project in order to receive $ 100,000 in 5 years.

Formula

The current present value is determined by the following formula:

PV = FV / (1 + i)t ,

where PV is the discounted value;

FV - the amount expected by depositors;

i - interest rate of investments;

t is the duration of the attachment.

The formula is very simple, and if necessary, you can find out the amount that the company will receive in the future with the available funds:

FV = PV * (1 + i)t

current present value
Application

It is possible to use this knowledge not only fordetermination of the necessary amounts, but also to calculate the expected profits. For this, net present value is used, which shows the amount of income less the invested funds. Using this indicator, you can find out the payback period of the project. This is especially true for large amounts, because it is always important to know how quickly this amount will begin to generate revenue. The discounted value helps to analyze the profitability of investments, and also to select projects where investments will pay off more quickly within the allotted time interval.

net present value
Discounted value can also helprecalculate receivables and payables. It is known that inflation leads to a depreciation of money, and thus, with a delay in payment, the purchasing power of the amount of debt decreases. This should be taken into account when calculating with suppliers and banks. It is for this reason that many companies prefer to enter into long-term contracts on deferred payment terms. This approach allows them to buy raw materials and products "at old prices." If these transactions are carried out on large amounts, then the savings are simply enormous.

It is also necessary to take this into account when implementingactivities as a supplier or distributor. When concluding contracts, it is necessary to provide for inflation and impose additional interest on the amount if payment is delayed. A balanced economic approach will help any company to anticipate possible complications in the calculations, and also invest its funds in the most profitable way.

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