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However, all deals depend on each participant's perspective. The buyer will want to pay to little, and the seller will want to receive too much. With this example, it looks as if no deal would ever get done. They'll need to be paid a higher price so they can put the proceeds from the sale in a lower yielding CD to reduce the investment risk. Thus, for the seller, the lower rate is more conservative. They'll ask themselves why take a risk and put the money into the market where there is the risk of losing principal? In that case, the seller might want to park the money in a 2% CD, so they'll use 2% as their discount rate. On the other hand, the seller may feel the tenants are reliable, and the cash flow is safe. In other words, for the buyer, using a higher discount rate is the more conservative approach. After all, why would they pay more to purchase the contract if they can earn 7% in mutual funds? The buyer will always want to use the highest discount rate they can justify because the higher the discount rate, the lower the PV – or the lower the cost of the asset. In that case, the buyer can use their average mutual fund return rate, say 7%, to calculate the PV of the lease. The buyer may feel that mutual funds and the lease have similar risks (mutual funds loss of value and the lessee not paying). What is the value of the contract to the prospective buyer? For example, a commercial building's owner is selling the property, and a tenant has ten years remaining on the lease. ExampleĪdditionally, buyers and sellers are very likely to use different discount rates. If you want to compare PV to something safer, you might use the US Treasury ten-year rate, which currently is at about 1.75% (August 2019). If you invest in the stock market, and for you, you earn on average 8% per year, you can use 8% for the discount rate to compare the present value with the return you earn from the market. When determining the discount rate, you could use several approaches. That is, there is no absolute right or wrong value one can use. Perhaps you want to invest in a mortgage? You'll need to calculate the PV of the said mortgage before you can make an offer or know if the offering price allows you to meet your investment objective.Ī discount rate is a personal number. The calculator is also particularly suitable for calculating the PV of a legal settlement, such as one involving alimony.įor the same reasons, this calculator can be used to calculate the PV of an investment cash-flow. Since an annuity is a regular, periodic cash-flow, and because this calculator allows you to set a specific first cash-flow date, it is capable of calculating the current value for any future stream of payments or investments. Use this PV of an annuity calculator to tell you. Perhaps you have won a court settlement payable as an annuity, or maybe you've been lucky enough to win a state lottery, and you want to receive the proceeds at once. when someone or some entity owes you money.More belowĪt a high level, there are two scenarios when you may want to know the present value of a cash-flow.
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In fact, sometimes this calculator is also known by the name discounted cash flow calculator. The present value of an annuity calculation considers these things and discounts the cash flow. Of course, you would rather have $100 today since there is risk in not receiving the money if you wait, and further, if you receive the payment today, you can invest it today and earn a return on the capital. Would you rather have $100 today, or $100 one year from now? The PV will always be less than the future value, that is, the sum of the cash flows (except in the rare case when interest rates are negative).īecause there must be compensation made to the party who has to wait for the money. The annuity may be either an ordinary annuity or an annuity due (see below). Thus this present value of an annuity calculator calculates today's value of a future cash flow. The present value ( PV) is what the cash flow is worth today. The cash flow may be an investment, payment or savings cash flow, or it may be an income cash flow. "Present value of an annuity" is finance jargon meaning present value with a cash flow.