What can make present value look good?

Expert Solution

Present value is the cash flow that is expected to be received in future after discounting it using an appropriate discount rate. In other words it is the current value of a future sum of money or a stream of cash flows that are expected to be received in future.

Present value = cash flow/(1+r)^n

Where r is the rate of discount and n is the year of the cash flow.

The present value can be made to good look mainly through the discount rate. The lower the discount rate the higher will be the present value of a future stream of cash flow. For example assume that you will receive $1,000 after 10 years. Now if the discount rate is 8% the present value of $1,000 today will be = 1000/(1+8%)^10 = $463.19

Now if the discount rate is reduced by 100 basis point to 7% then the present value will be = 1000/(1+7%)^10 = $508.35

Thus present value can be made to look good by using a lower rate of discounting.

jeff jeffy answered 2 years ago

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