[strugglebus91]

Hi Everyone,

I am having trouble understanding a lot of problems that have to do with present value. I don’t necessarily have issue with loans/notes/bonds, but once I see present value in a problem, I freeze because I generally don’t understand what it is or when to use it or when to ignore it. I feel like if someone can explain to me it’s usefulness I can find more application/understandability in problems.

Thanks

Aud - 61
Bus - (5/2)
Reg
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[Ana]

love your photo

[cmcook]

Best movie ever.

Did you google a youtube about PV? That's what sealed the deal for me.

I had an intermediate 1 teacher that defined it in plain english… something along the lines of “money in the future is worth more because that money earned interest. So if you want to know what a future amount of money is worth now, you have to reduce its value, basically, back out the interest that accrued in future years”.

PV and DCF is heady, but once you understand it, it's easy peasy.

[RB]

My bachelors was in econ, so I'll give this a shot.

PV is based on a few assumptions, basically there is some rate of inflation and/or there is something we can do with a dollar today.

Say we have $100, theoretically we could invest it or stick it in a bank or stocks, and we assume a year from now that $100 would grow to $105. That is a 5% return, and in this case we'll call that 5% return our “discount rate.” This is the same concepts these businesses use saying hey, if I had $100, I expect I could use that to generate another $5, or $8, or $11, or whatever over the next year.

$100 today is worth $100. But if you give me $100 in a year from now, it's not worth the same as if you gave me $100 today because I could do something with that today. Our discount rate is what accounts for that.

So, let's stick with 5% being what we could get on that money. In this example, $100 a year from now, discounted at 5%, is only worth ( $100 / (1.05) ) = $95.24
(1.05 being 1 + 5%, or “r” or “d” for discount rate)

$100 2 years from now is only worth $100 divided by 1.05 twice,
so ( $100 / (1.05*1.05) )
= ($100 / (1.1025) ) = $90.71

If they give you a PV factor its basically that value above as a decimal, so the value of $1 1 year from now with a discount rate of 5% is 0.9524, and the PV of $1 2 years from now at 5% is 0.9071, etc.

Does this make sense? I'll clarify further if I can help

[Author]

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