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Hi, I watched your lecture on present value but how that works in real life?
1. Investors use present value to calculate the current value of future cashflows resulted from either borrowing a loan or investment done in an asset?
2. In context of borrowing present value tells us how much we should borrow today to have specific future liability. For eg we can only afford to pay $120,000 but what amount we must borrow today to get $120,000 liability in the future?
3. In context of investment present value tells us how much we should invest today to have specific future income. For eg we want to earn $100,000 but what amount we must invest today to get $100,000 income in the future?
4. Present value follows the principle of discounting which effectively means remove the interest element from Future value of cashflows (deferred consideration) using a discount rate for a specified period because we assume that it could be earned if invested but we assume that we are not investing now?
5. Investors use future value to calculate the future value of present cashflows resulted from borrowing and investment purpose?
6. In context of borrowing future value tells us how much we should borrow and invest today to have specific future income. For eg we want to earn $150,000 but what amount we must borrow and invest today to get $150,000 income in the future?
7. In context of investment future value tells us how much we should invest today to have specific future income. For eg we want our income to grow to $150,000 but what amount we must invest today to get $150,000 income in the future?
8. Future value follows compounding principle through interest growth over time which effectively means interest is earned on interest?
I know its too much to ask but please could you correct me on this if I’m wrong?
1. Yes
2. Unlikely because if they borrow 120,000 they will have to repay 120,000 and so no discounting is involved. Obviously they will pay interest each year.
3. Yes
4. Yes.
5. Yes for investing. The interest rate on borrowing is part of the calculation of the discount rate to use.
6 & 7 Are saying the same thing, otherwise yes.
8 Yes, but nobody is interested in the future value whether in exams or in practice.
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