If the concepts of finance were to be listed down in order of their importance, the concept of ‘Present Value’ will be at the top of that list.
In simple words, present value describes the process of determining what a cash flow to be received in the future is worth in today’s rupees.
In simpler words, it is the value today of an amount of money in the future.
“I’m still not getting it!” you might say.
“How do you calculate present value?”
“What’s the relevance of present value in investing?”
Well, if these are some questions that crop up in your mind as soon as I use the term present value, and before you junk it as some ‘difficult to understand’ concept that you must not worry about, just check out this small video.
I prepared this video a few minutes back after receiving an email from a subscriber of the ‘Value Investing for Smart People’ course where I’ve tried to explain this concept in very simple terms.
But then, everything in this world can be made even simpler, and that is what I’ve tried to do with present value through this video.
Sometimes I wish I had access to such easy ways of learning when I was taking my first steps in the world of investing and finance nine years back.
Anyways, you must not miss out on what I did.
So here’s present value explained in a very simple way…the Safal Niveshak way.
I hope you will learn this important concept through this video, and would also share it with your friends and colleagues who might be interested in the subject.
Let’s get started.
If you can’t view the video here, click here to view. And, by the way, don’t forget to turn on your speakers.
Great job in simple layman’s language.
I had studied it in 1974-75, while doing my Masters in Operations Research in US; a course in Managerial Economics devoted a fair amount on Discounted Cash Flow Analysis, including the mathematics of it- its a long time, and you have refreshed my memory and brought me down to earth!!
The analysis on L& T was pretty exhaustive and its valuation is coming down to fair value!!
Keep up the good work.
Dear Mr. Chandrashekar,
Thanks a lot for your feedback on the video.
Regards,
Vishal
Thank you very much for teaching the concept of Present Value..You really made it much simpler..
And I have a question.
Where can I find the cash flow of any company for the nexe five years to calculate the present value?
Hi Shankar, thanks a lot for your feedback.
The cash flow for the next 5-10 years is an assumed figure. It is generally based on the rate of growth at which a company has grown its cash flows in the past, plus some assumptions for the future on factors like sales growth, profit margins, capital expenditure, and working capital.
I hope this explanation helps.
Regards,
Vishal
Great Explanation, At least now i completely understand what the blogs such as yours are telling when they refer to present and future value. However as you said that the cash flow is assumption based on certain parameters, will people like be able to calculate this accurately? additional it is worth the time for people like us? I am aware that no learning goes for a waste and neither trying will hert.
The Next post actually answered my questions, So ignore the question please 🙂
Hi Vikrant, thanks for your feedback anyways. 🙂
Dear Vishal,
After viewing the presentation, I too felt that “I Wish Someone Had Taught Me About ‘Present Value’ This Way” some 10 years back.
It can’t be presented better than this. It is made so simple that anyone can understand.
Thanks Ajay for your words of appreciation! Regards.
Money in the future would value more than today.