1.2 Present Value

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Valuation for Startups Using Discounted Cash Flows Approach

121 calificaciones

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Yonsei University

Valuation for Startups Using Discounted Cash Flows Approach

121 calificaciones

Curso 1 de 5 en SpecializationValuation and Financial Analysis For Startups

Discounted cash flow method means that we can find firm value by discounting future cash flows of a firm. That is, firm value is present value of cash flows a firm generates in the future. In order to understand the meaning of present value, we are going to discuss time value of money, first. That is, the value of $100 today is different from the value of $100 a year later. Then, what should be the present value of $100 that you are going to receive in 1 year? How about the value of $100 dollars that you are going to receive every year for next 10 years? How about forever? After taking this course, you are going to be able to find the present value of these types of cash flows in the future. Unlike most of finance courses, in this course, you are going to learn how to use excel to find present value of future cash flows. In addition to the present value, you are also going to learn how to find future value given investment; interest rate given investment and future cash flows, payments given interest rates, number of periods to wait given investment and interest rate, and so on. After learning the concept and how to find the time value of money, you are going to apply this to real world examples and company valuation. After taking this course, you will be ready to make an estimate of firm value by discounting its cash flows in the future.

De la lección

Time Value of Money (1)

Investing money is important decision because a dollar today is worth more than a dollar in the future. In this module, you will look at several methods for calculating future value as well as present value. After this module, you can solve challenging examples with excel.

Welcome Video1:26

1.1 Future Value9:16

1.2 Present Value6:50

1.3 Present Value of Multiple Cash Flows5:56

1.4 NPV of Multiple Cash Flows4:05

1.5 Present Value of Annuity3:56

Conoce a los instructores

Hyun Han Shin
Professor
School of Business

Now we are ready to make a formula for present value.

PV is Present Value.

As we learned in the previous class,

present value is future value divided by (1 + Interest rate).

Let's take a look at a few examples to understand how to find

present value given future value and interest rate.

Suppose we need $650 to buy an iPhone next year.

You can earn 3% on your money.

How much do you have to put up today?

In this example, future value is $650.

Rate is 3%.

The equation is $650 divided by

(1+3%) is equal to $631.07.

Thus, you have to put up $631.07 today to buy an iPhone next year.

You can solve this with Excel.

Let's find PV using Excel template.

First, type in 650 for FV

Since that is the amount you need in the future.

Type in 3% for rate.

Since it is the interest rate.

Type in 0 for PMT.

And type in 1 for NPER

Since you want to buy an iPhone in 1 year.

Then you'll see that PV is 631.07

As you've learned already

Negative PV means cash outflow or investment.

That is, you have to put up $631.07

at 3% interest rate to earn $650 in one year.

We can make sure whether your answer is correct by

calculating FV using PV you found from Excel.

Let's move to Excel again and type in

631.07 for PV.

Type in 3% for rate.

Type in zero for PMT

Type in 1 for NPER

And you'll get FV of $650.

That is exactly what you need.

Let's take a look at another example.

You are interested in purchasing a car that costs $70,000 in three years.

If you can earn 6% on your money.

How much do you have to invest today to buy the car in three years?

In this example, future value is $70,000.

Rate is 6%, and the number of periods is 3 years.

The equation is $70,000 divided by one plus 6%

raised to the power of three is equal to $58,773.

Thus, you have to invest $58,773

today to buy the car in three years.

We can solve this with Excel.

Let's start the Excel and type in numbers.

Type in 70,000 for FV.

Type in 6% for rate.

Type in 0 for PMT.

Type in 3 for NPER.

And you'll get PV of $58,773.35.

This is same as what you get with the mathematical formula.

We can make sure whether your answer is correct

by calculating FV using PV you found from Excel.

Let's move to Excel.

And type in $58,773 for PV

Type in 6% for rate

Type in zero for PMT

Type in 3 for NPER

And you'll get FV of $69,999.58,

which is about $70,000.

And the difference is due to the rounding error in the calculation of PV.

Let's take a look at another example.

Assume an annual interest rate is 7%.

How much would an investor need to lend today so

that she could receive $800 in two years?

In this example future value is 800.

Rate is 7% and the number periods is 2 years.

The equation is $800 divided by (1 + 7%)

raised to the power of 2 is equal to $699.

Thus, you have to invest, $699 today to receive $800 in two years.

You can solve this with Excel.

Let's move to excel and type in numbers.

Type in 800 for FV.

Type in 7% for rate.

Type in 2 for NPER.

Type in 0 for PMT.

And you'll get PV of $698.75.

You can make sure whether your answer is correct

by calculating FV using PV you found from Excel.

Let's move to Excel and type in the following numbers.

Type in 698.75 for PV.

Type in 7% for rate.

Type in 0 for PMT.

Type in 2 for NPER.

And you'll get FV of $800.

I hope you understand how to calculate the present value now.

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