El present value value is the price of money that we will have in the future but calculated at present value. In this article we will describe in more detail what this formula consists of.
The present value does not only apply to companies, it is also considered to be used when a person wishes to retire or retire.
Present value
Called VP is a formula that is applied to know the value that an amount of money that we can receive in the future has today. In other words, the present value establishes the amount of money that we are going to have in the future based on the value of the same amount at the present time.
It is a process that is carried out through a formula and two factors are needed to achieve the result: The average flow of money that we will pay in the future and a rate that determines how to dismantle that flow; This formula then seeks to reflect that it is better to have an amount of money today than to expect and receive it in the future.
It is logical then that with the money we have in the present we can make investments, buy shares or acquire goods. So if you don't have a plan to invest, the money is spent and won't have the same value in the future, so just save it and don't put it to work.
That is why many people do not want to receive those amounts in the future since they will not have the same value. But also the opportunities to put it to work will not be the same in the future, so it is good to know in depth how this formula is applied as a strategy to grow money in a stable way.
This formula is generally used to get answers about whether it is convenient to invest the money in a specific project and thus value the assets of the company.
In some cases it is important to calculate the value of the pension that will be received in the future, that is, some companies offer immediate amounts to their employees to avoid disbursement later. At that time the worker could assess whether to accept it or not.
In this article, How to calculate the value of a company? It can also be considered as a strategy to value assets and flows in the future.
How is it calculated?
To find out how to get present value the following formula is applied: PV= Fn/(1+r)n, Where PV is the future value, in the number of years in the future, is the discount rate Then the formula works as follows, if we receive a amount of money in the future must be applied a discount rate "r" so that it reflects the cost of the opportunity. But let's see better with an example.
We want to value a project in which we want to discount the flows that we will receive at a certain average rate. If the VP is greater than 0, the investment is viable, let's see:
Andrés asks his friend Felipe to rent his house for 4 months with a monthly payment of 6.000 dollars, the first payment must be made today, after that time he will buy the house for 50.000 dollars. The opportunity cost is 5% per month, so the question is what is the present value of the project?
We calculate the PV: PV= 6.000 + 6.000/(1+5%) + 6.000/(1+5%)2 + 6.000/(1+5%)3 + 50.000/(1+5%)4 , PV= 230.760,19 .XNUMX dollars of approximate value, which indicates that it is very positive to sell the house in these conditions. This present value can be used for many investment operations, it is important to take into account the values shown above.
For any businessman who wishes to obtain a sample of the results of future investments, it is important to take into account these types of strategies where they can offer trends to know where to invest his money in the present. Likewise, the consideration is determined for organizations of any type.
