What is Discounted Value?
Discounted value is the present value of future cash flows discounted to their present-day equivalent. It is a way of taking the future value of a series of cash flows and converting it into its present-day equivalent. The discounted value of a series of cash flows is calculated by discounting the cash flows at a certain rate of interest.
Examples of Discounted Value
- A business may use discounted value to evaluate the expected return of an investment. For example, if a business expects to receive $5,000 five years from now, it can calculate the discounted value of that cash flow in the present day.
- Discounted value can also be used to value a company. For example, if a company is expected to generate $1 million in cash flows in 10 years, the discounted value of that cash flow can be used to determine the current value of the company.
- Discounted value can also be used to determine the fair value of a bond. For example, if a bond is expected to pay $1,000 in 10 years, the discounted value of that cash flow can be used to determine the current value of the bond.
Conclusion
Discounted value is an important concept in finance and is used to evaluate the expected return of an investment, value a company, and determine the fair value of a bond. It is a way of taking the future value of a series of cash flows and converting it into its present-day equivalent. For more information, please visit: