Question

how do you get the PV factor?

Answer 1

The following steps to get present value factor.

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

P.V.F =

Where, P.V.F = Present Value Factor, r = Discount Rate, n = Number of years