Time Value of Money – Principles of Discounting Cash Flows
Time Value of Money
Principles of Discounting Cash Flows
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00:50 – Principles of Discounting Cash Flows
02:00 – Manual calculation of the PV of a series of identical future cash flows
05:00 – Formulas to calculate the PV
06:00 – Spreadsheets and integrated formulas
08:35 – Example of calculations
10:30 – Conclusions
Time Value of Money – Principles of Discounting Cash Flows is about how time decreases the value of future cash flow due to discounting
We already learned about the time value of money and we calculated the future value of cash flow and we also calculated the present value of single cash flow.
Now, we are going to apply this principle on a series of equidistant constant cash flows.
When we have a cash flow C n-years from now, we can discount the cash flow by dividing C with (1+i) to the power n. We do this for all the cash flows and then we add then to find the present value of this series of cash flows.
We also van use built-in formulas in spreadsheet programs like Excel where we can do the calculations using this formula
Present Value = PV(rate, nper, pmt, [fv], [type])
rate = the periodic interest rate
nper = number of periods we have cash flows over
pmt = monthly cash flows
[fv] = eventual remaining FV of the cash flows
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