Present Value Of Future Payments (E)
What is the project? How to select and justify the project? How to plan and execute the project?
Posted: Sep 2010
Finding the present value of future payments is called discounting. The purpose of discounting process is finding the present value of a cash flow a certain number of time periods in the future. As you work backward from the future payments to get to the present value, the future sums decrease until you reach the present value. This process is the reverse of the compounding process, which is the process for finding the time value of money.
Here is another way to think about discounting. If you received €10,000 today, the present value would obviously be €10,000 because the present value is what your investment gives you now if you were to spend it today. If €10,000 were to be received in a year, the present value of the amount would not be €10,000, because you do not have it in your hand now, in the present.
To find the present value of the €10,000 that you will receive in the future, you will need to consider the €10,000 as the total future value of an amount that you invested today. In other words, to find the present value of the future €10,000, we need to find out how much we would invest today in order to receive that €10,000 in the future.
The formula for finding the present value of future payments is:
FVn - Value of the money after the end of periods
i – Interest rate
n – Number of periods
This formula uses the same four variables as the formula for the time value of money (present value, future value, interest rate, and number of periods). As with the time value of money calculation, if three of the four variables of the equation are known, then the value of the fourth variable can be determined.
Continue on Project Management:
1. Project Management Overview
2. 9 Areas of Project Management
3. Project Lifecycle – 5 Stages of Project
4. How to Determinine a Value of the Project?
4.1. Simple Payback
4.2. Average Return on Investment (ROI)
4.3. Net Present Value (NPV)
4.4. Internal Rate of Return (IRR)
4.5. Cost/benefit analysis
4.6. Time value of money
4.7. Present value of future payments
4.8. Justification of Addopted project
5. Project Planning – Project Charter
6. Work Cascading Structure (WBS)
7. Project Scheduling ( Arrow-on-Arrow and Gantt Chart )
8. Project Scheduling ( CPM and PERT )
9. The Responisbility Matrix
10. Resources and Budget Planning
11. Clasification of Projects