Discounted value and its value

Such a concept as the discounted valueexists not only for solving student economic problems, but also for conducting real commercial activities. It helps to assess the profitability of investment, the payback period of investments or projects. Each company manager needs to clearly understand the cash flow, their cost, and the impact of inflation, default, and other economic metamorphoses.

Definition

Discounted value is the meanswhich are required today to receive the specified amount in the future under the specified conditions. In order to better understand this, you can give an example. Suppose that in five years the company wants to receive an amount of $ 100,000 from its investments. Deposit conditions imply capitalization of funds with 10% profit. Thus, the discounted value of the required amount today will be about $ 18,200. This means that it is necessary now to invest $ 18,200 in this project in order to receive $ 100,000 in 5 years.

Formula

The present discounted value is determined by the following formula:

PV = FV / (1 + i)^t ,

where PV is the discounted value;

FV - the amount that investors expect to receive;

i is the interest rate on investments;

t - the duration of the investment.

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

FV = PV * (1 + i)^t

Application

You can use this knowledge not only fordetermine the required amounts, but also to calculate the expected profits. To do this, use the net present value, which shows the amount of income minus 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 income. Discounted value helps to analyze the profitability of investment, as well as select projects where investments will pay off more quickly in a given period of time.

Discounted value can also help.recalculate receivables and payables. It is known that inflation leads to the 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 a deferred payment. This approach allows them to buy raw materials and products "at old prices." If these transactions are carried out for large sums, then the savings are simply colossal.

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