Present Value: A Note on Personal Applications

17 Pages Posted: 30 May 2017

See all articles by Mark E. Haskins

Mark E. Haskins

University of Virginia - Darden School of Business

Abstract

This note explores discounted cash flows as a core technique for valuing a business, allocating scarce resources, and comparing alternative investments. Suitable for MBA and undergraduate business students, this note builds on students' basic understanding of discounting future cash flows with simple examples to which students can easily relate. Whether the discounted cash flow process used to derive a net present value or an internal rate of return metric, it is powerful, rational, and informative.

Excerpt

UVA-C-2314

August 3, 2010

Present Value: A Note on Personal Applications

If you were to ask people who work in the financial arena what one financial analytical technique should be in the Financial Hall of Fame (if there were such a thing), one response would probably dominate: “discounted cash flows for determining present value.” This technique is well documented as core to valuing a business, allocating scarce resources, and comparing alternative investments. Whether the process is used to derive a net present value (NPV) or an internal rate of return (IRR) metric, it is powerful, rational, and informative.

This note presumes a basic familiarity with the technique of discounting future cash flows. As a refresher, however, these are its three fundamental premises:

1. A dollar today is more valuable than a dollar tomorrow due to the 24-hour use of the one today (ignoring any uncertainty factors).

. . .

Keywords: present value basic accounting terms exercise follow-on follow-up

Suggested Citation

Haskins, Mark E., Present Value: A Note on Personal Applications. Darden Case No. UVA-C-2314, Available at SSRN: https://ssrn.com/abstract=2974019

Mark E. Haskins (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924 -4826 (Phone)

HOME PAGE: http://www.darden.virginia.edu/faculty/haskins.htm

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