CONCEPT OF PRESENT VALUE

CONCEPT OF PRESENT VALUE:

The present value concept is a fundamental concept used in the share valuation procedure. An understanding of this concept is necessary for studying the share valuation process.

Money has a ‘time value’. This implies that a rupee received now is worth more that a rupee to be received after one year, because the rupee received now can be deposited in a bank at 10 per cent interest rate to receive Rs. 1.10 after one year. The time value of money suggests that earlier receipts are more desirable than later receipts, because earlier receipts cab be reinvested to generate additional returns before the later receipts come in.

Calculated using the compound interest formula: 

	F (1+K)n

 

P=

Where,

P=Present Value

F=Fund or Amount to be received after N year

N= Number of Year

k=Discount Rate