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The above value is a concept according to which the amount of money today will cost more than the same amount in the future. In other words, the money received in the future does not cost as much as the equivalent amount received today.

The above (current, discounted) cost (PV) – what is it

Hello, the readers of the Tulyagin project are respected! In today's article, we will talk with you about such a concept as The above cost or more simple and affordable – current cost. You will find out to become what is and what is the main essence of the value of the value, how inflation affects the purchasing power of money and where the cost is. Finally, the article sets out the formula and calculation of the above value with examples. About this and much more related to the current value, then in today's article.

The above (current, discounted) cost (PV) - what is it

The content of the article:

What is the above value (PV)?

The above cost (PV), (also often called as current cost or discounted cost) – this is the current cost of the future amount of money or flow of money at a given rate of profit. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the cost of future cash flows. The definition of a suitable discount rate is the key to the correct assessment of future cash flows, whether it is profit or debt obligations.

The essence of the above cost (PV)

The above cost – This is a concept according to which the amount of money today will cost more than the same amount in the future. In other words, the money received in the future does not cost as much as the equivalent amount received today.

Obtaining 100,000 rubles today will cost more than 100,000 rubles in five years. Why? The investor can invest 100,000 rubles today and supposed to receive income over the next five years. The above value takes into account any interest rate that the investment can bring.

For example, if an investor receives 100,000 rubles today and can receive a profitability of 5% per year, then today's 100,000 rubles, of course, costs more than receiving 100,000 rubles in five years. If the investor has been waiting for five years to get 100,000 rubles, there would be alternative costs or the investor would have lost profitability in five years.

Inflation and purchasing power

Inflation is a process in which prices for goods and services are rising over time. If you receive money today, you can buy goods at today's prices. Presumably, inflation will cause increasing prices for goods in the future, which will reduce the purchasing power of your money.

It can be expected that the money that is not spent today will lose value in the future due to some implied annual rate, which can be inflation or the norm of profit if the money has been invested.The formula of the above value discounts the future value to today's rubles, taking into account the alleged annual rate either from inflation or from the rate of profit that could be received if the amount was invested.

Discount rate to determine the above cost

The discount rate is the rate of profitability of investment, which is used in calculating the above cost. In other words, the discount rate would be a missed profit rate if the investor decided to accept the amount in the future compared to the same amount today. The discount rate selected to calculate the above value is very subjective, because this is the expected rate of profit that you would have received if you invested today's dollars for a certain period of time.

In many cases, a risk -free return rate is determined, which is used as a discount rate, which is often called a threshold rate. The rate is a profit rate that needs to be obtained from investments or project so that they can be continued. The rate of the US Treasury bonds (or government bonds of other countries, in Russia this OFZ) is often used as a risk -free rate, since treasury bonds are supported by the US government. So, for example, if two -year -old tenderris give 2% per annum or profitability, investments should bring at least more than 2% to justify the risk.

The discount rate is the amount of the time value and the corresponding interest rate, which mathematically increases the future value in the nominal or absolute terms. And vice versa, the discount rate is used to calculate the future value from the point of view of the above value, allowing the lender to pay for the fair amount of any future income or obligations in relation to the above capital value. The word discount refers to the future value discounted to the current cost.

The calculation of a discounted or given cost is extremely important in many financial calculations. For example, the net valued cost, the profitability of bonds and pension obligations depend on the discounted or given cost. Studying how to use a financial calculator to calculate the above value can help you decide whether you should accept such offers as cash discount, 0% financing when buying a car or mortgage payment.

Formula of the above value PV and calculation

Cost (current) cost (PV) = Fv / (1 + r) ^ n

where:

FV – future value
R – profit rate, discount rate
n – number of periods

Enter the amount that you expect to receive in the future, in the numerator of the formula.
Determine the interest rate that you expect to receive between the current moment and the future, and indicate the rate in the form of a decimal fraction instead of “R” in the denominator.
Enter the period of time as an indicator of the degree of n in the denominator. So, if you want to calculate the given value of the amount that you expect to receive in three years, you must set the number three instead of “n” in the denominator.
On the Internet there are a number of online calculators for convenient and quick calculation of the above cost. For example, this one.

Future cost and given (current) cost

A comparison of the current value (PV) with the future value (FV) best illustrates the principle of the temporary value of money and the need to charge or payment of additional interest rates based on risk. Simply put, over time, money today costs more than the same money tomorrow. The future cost may refer to future cash flows from investing today's money or future payments necessary for the return of money borrowed today.

The future value (FV) is the cost of the current asset at a certain date in the future based on the estimated growth rate. The FV equation involves constant growth rates and a one -time advance payment, which remains untouched throughout the entire investment period. The calculation of fair value allows investors with varying degrees of accuracy to predict the amount of profit that can be obtained from various investments.

The above value (PV) is the current cost of the future amount of money or flow of money at a given rate of profit. The above value accepts the future value and applies the discount rate or interest rate, which can be obtained in case of investment. The future cost tells you how much the investment will cost in the future, and the current cost tells you how much you need in today's rubles to earn a certain amount in the future.

Criticism of the current value

As indicated earlier, the calculation of the above value implies the assumption that the profitability of funds can be obtained over a certain period of time. In the given discussion, we examined one investment for one year. However, if the company decides to continue a series of projects that have a different rate of profitability for each year and each project, the above value becomes less defined if these expected revenue standards are unrealistic. It is important to consider that when making any investment decision, interest rate is not guaranteed, and inflation can reduce the profitability of investments.

An example of the above value

Suppose you have a choice: receive 200,000 rubles today and 3% per annum or 220,000 rubles in a year. Which option is better?

Using the formula of the above value, the calculation will be 220,000 rubles / (1 +. 03) 1 = 213 592 rubles
PV = 213 592 rubles, or the minimum amount that you will need to pay today in order to get 220,000 rubles in a year.In other words, if you were paid 200,000 rubles today and based on the interest rate of 3%, this amount would not be enough to give you 220,000 rubles in a year.
As an alternative, you can calculate the future cost of 200,000 rubles today in a year: 200,000 x 1.03 = 206,000 rubles.

The above value provides the basis for assessing the justice of any future financial benefits or obligations. For example, a future return of funds, discounted to the above value, may or not cost potentially higher purchased price. The same financial calculation applies to 0% financing when buying a car.

The payment of a certain percentage at a lower price may be more profitable for the buyer than paying zero interest at a higher price. The payment of a mortgage now in exchange for lower mortgage payments in the future makes sense only if the above cost of future mortgages for mortgages is greater than mortgage payments paid today.

Summary

The above value means that the amount of money today costs more than the same amount in the future.
In other words, the above value shows that the money received in the future does not cost as much as the equivalent amount received today.
The money that has not been unused today may lose value in the future due to the alleged annual rate due to inflation or profit, if the money was invested.
The calculation of the above value involves the assumption that the profitability of funds can be obtained for the period.

And this is where all about The above cost. I hope the article was useful for you. Share the article on social networks and messengers and add the site to bookmarks. Success and until new meetings on the pages of the project Tulyagin!