Present Value Factor Calculation | Steps involved | Calculator

Steps involved in calculation of Present Value Factor (P.V.F)

The following steps are involved in the preparation of present value

1. Cash outflows of the first year is taken as it is since the cash outflows of one rupee is equal to one rupee.

2. Cash inflows for different periods are considered as cash received after tax but before depreciation.

3. Cash inflows is considered for full economic life of the project.

4. The salvage value or scrap value of the project is considered as cash inflows.

5. Both cash inflows and cash outflows should be discounted at a predetermined discount rate.

6. Generally, cost of capital of a firm is considered as discount rate. It is otherwise called as cut-off rate.

7. If the management wishes the discount rate is other than the cost of capital, the decision of management is final, such rate is taken as discount rate. In this case, generally, discount rate is some what higher than the cost of capital.

8. The present value factor is identified with the help of discount rate.

Formula to calculate P.V.F

The following formula is used to find the present value factor.

P.V.F = 1/(1+r)^n

Where,

P.V.F = Present Value Factor

r = Discount Rate

n = Number of years

The following example clears the calculation of present-value factor.

  • Discount rate is 12%.
  • Number of year is three.
  • The present value factor is 0.712

0.712 means means that Rs.1000 receivable after 3 years is equal to Rs.712 today. In other words, Rs.712 invested today at 12% will bring Rs.1000 after three years.

9. Then, the present value of cash inflows for different values are calculated with the help of present value calculator at 12%.

10. The cash outflows at subsequent periods are discounted at the same rate of present value factor.

The present value of total cash inflows should be compared with the present value of total cash outflows. If the present value of cash inflows are greater than (or equal to) the present value of cash outflows (or initial investment), the project would be accepted. If not so, then the project will be rejected.

Refer this page: Calculators A to Z for more financial calculators.

Leave a Reply

Recent Posts




Recent Comments


Related pages


essentials of valid considerationblueprint advertising agencysebi definitionsecuritized bondsmarginal costing in accountingdecentralized filing systemego involvement definitionlet the buyer beware meaningadvantages of marginal cost pricingaccounts receivable turnover ratio interpretationinternal rate of return vs npvautocratic teaching styleselective credit controldefinition of consumer behaviour by philip kotlerpersonal attributes of an auditorperil and hazard in insurancewhat is meant by amalgamationcash ledger bookauditing in computerised environmentdefine alphanumericwhat is vouching auditdepartmentation typesadvantages of a debenturecheques definitionsampling defdisadvantages of rural areaslabor variancesveil liftingservice blueprinting processmanagement by objective mbotrading as a sole tradernegotiable instruments in business law75000 inr to usdadvertisement and propagandawhat is ultra vires doctrineinternationalization definitiondefinition of controllable costtypes of valid contractsidbi loansecured redeemable non convertible debentures meaningtypes of underwritersannulment conditionsadvantages of retained earningsdifference between void and voidable agreementwhen was rbi establishedfixed and floating chargesdefinition for urbanizationnumeric filinggsp money mattersdisadvantages of flexible budgetimpossibilities meaningfactory overhead expenses listoverhead apportionment definitionnpa assetsadvantages of quota samplingpetty cash definition in accountingcalculating employee turnoveradvantages of franchising to the franchisorpayback method formulasecuritize definitionaccounting cash budgetfob pricing definitionmeaning of budgetary controlpersonal selling skills definitioncomparative classified balance sheetnegotiable instruments definitionagreement not expressly declared voidamalgamation companieselements of a promotional mixtamil nadu small scale industriesfunctions of retailers and wholesalersdisadvantages of product departmentalizationnationalization of commercial bankswhat is urbanisation definitioncheque drawee meaning