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# Break down the Concept of Present Value into Simpler Terms for Better Understanding!

By Michelle Johnson
3 Apr, 2018
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Days after completing my higher studies, I found a newly found interest in investing in shares. The expected returns and thoughts of becoming a millionaire were just miles away.
But if earning would have been so easy, the world would have run parallel right?
Well, you never know what future has in store for you; but is practical and essential to know present values of future cash generations and incomes.
For all those students who are wondering as to how to deal with this issue, present value homework answers are of real help!
If you could ascertain the current worth of future transactions, your decisions shall be accordingly and you may actually be able to work wonders. Therefore, present value in economics perspective has significance, larger than it actually seems to have. Breaking down of the terminology shall be the need of the hour.
What exactly does present value mean?
The layman meaning of present value homework answers is the worth of a future amount, today, i.e. it describes how much shall a future sum be worth today. Ok so tell me one thing, if you are offered 50\$ and have an option to take the money instantly, or 6 months later, what option will you choose? Well a prudent man shall take the money instantly, the main reason being that the 50\$ today is worth more than 50\$ in 6 months time. See?Â  That is exactly where the present value comes into play.
Therefore, a proper definition of present value would be â€“ â€œPresent value is the present or current cost of a future amount or cash flows at the time of valuation, with a specified rate of return.â€ In context of present values, discount rates tend to play a major role. The cash flows in the future are been discounted, and it is to be noted that the discount rates are inversely proportional to the present value of future cash flows, i.e. higher the rate of discount, lower is the present value.
Time preference in deciphering present value
If you are an investor, and have a certain amount of money in your hands, you can either spend it, or save it. Spending the amount may be a popular option, but if you ascertain the present value, you shall be perceived to save the money because money accrues itself compound interest over the future, and the value tends to increase. That is why it is said that â€œa dollar worth today, is more than a dollar worth tomorrow.â€
Present value homework answers shall enable you to conceptualize the basics of how efficiently the present value systems actually work. You might not know but present value calculations are extremely important in other complex financial calculations, such as bond yields, net present value, pension obligations, etc.
Once you are equipped with basic financial calculators, you shall be able to decide whether or not to accept cash rebates, pay mortgage points, or even accept car financings.
Future value aspects in present value homework answers
I accompanied a friend of mine to a car showroom as he was looking for a sedan modeled vehicle. After deciding the model, we went to the manager to have a chat regarding payment details. He was offering 0% financing i.e. a discount on future cash rebates. Having a little knowledge of present value homework answers, my friend decided to pay some interest on a lower price rather than deciding to go for 0% financing for a higher sticker price.
Therefore, it can be said that the reason for todayâ€™s money being worth more than futureâ€™s amount, is due to the fact that the passage of time has financial value imbibed to it as well, and hence prices are demanded for using todayâ€™s money. And always remember one thing, present value is always less than or equal to the future value.
Some problems and their solutions
Ok guys, imagine that you are all grownups and decide to invest something for your son or daughter, the prizes of which shall be enjoyed by them after, say 10 years. So, Barry decides to deposit certain amount in his bank as he wishes that his son buys a nice motorbike after 10 years. Assuming the receiving rate of interest as 5% on a savings account, and willing that at least 10,000\$ are available to him after a decade, how much shall he be depositing currently?
The basic formula for calculating present value is [PV = CF/(1+r)n]; where PV is the present value homework answers which is to be calculated, CF is the cash flows in future which is 10,000\$ in this case, â€œrâ€ is the rate of interest which is 5%, and â€œnâ€ is the number of periods i.e. 10 years in this case.
Therefore, knowing how to calculate present value shall enable you to ascertain that to attain such wishes, a sum of around \$6100 needs to be deposited today so that it accrues up to 10000\$ when required.
Therefore, ascertaining the present value is important to find out certain estimates, such as expecting to earn a onetime cash flow in 5 years, or valuating a firmâ€™s future cash flows, present value ascertainment is essential.
Some amazing facts you might not know
The State Government of California announces a lottery prize of 10 million \$ every year to one of its luckier citizens. Instead of paying the amount altogether, it promises to pay 5,00,000 \$ every year for twenty years.
So, ascertaining the rate of interest, and future cash flows, it has been calculated that the present value homework answers i.e. the actual amount spent by the government is not more than 4.5 million \$. That is some smart business folks.
Significance of present value in economics
The concept of present value is the basis upon which stock prices, bond prices, financial calculations, insurance and pension valuations, and even lottery giveaways are made. The money received today can be invested in the future, to get returns i.e. time value of money is accounted by ascertaining the present value itself.
However, present value homework answers are not always correct and may be erroneously calculated as well because of variable market factors, but a few tricks up your sleeves can actually work wonders for you. Just study the market, its trends and histories, you will know the significance.
So, from now onwards, if someone offers you 100\$ today or after a year, tell him that 100\$ today shall be 105\$ tomorrow. Keep accruing. Take care.

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