![]() Because the PV of 1 table had the factors rounded to three decimal places, the answer ($85.70) differs slightly from the amount calculated using the PV formula ($85.73). that is most valuable today, should be chosen. The project with the highest present value, i.e. These calculations are used to make comparisons between cash flows that don’t occur at simultaneous times, since time dates must be consistent in order to make comparisons between values. An investor can decide which project to invest in by calculating each projects’ present value (using the same interest rate for each calculation) and then comparing them. ![]() The project claims to return the initial outlay, as well as some surplus (for example, interest, or future cash flows). The cash outflows at subsequent periods are discounted at the same rate of present value factor. The concept states that a dollar today is worth more than a dollar tomorrow because you can get paid a rate of interest. The time value of money (TVM) is a concept that is fundamental to financial theory. Discount rate depends on the risk-free rate and risk premium of an investment. Discounting rate is the rate at which the value of future cash flow is determined. ![]() A very important component in present value factor is the discounting rate. ![]() As stated before, there can be a different rate for cash flow at different time period based on inflation and risk premium, but for simplicity purpose, we will use a single rate for discounting cash flows at different time intervals. Rate – Rate is the interest rate or discounted rate used for discounting the future cash flow. Bookkeeping by Adam Hill Use of the Present Value Factor Formula ![]()
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