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Fundamentals of Financial Management, Third Edition by Vyuptakesh Sharan

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2.3 COMPUTATION OF PRESENT VALUE OF CASH FLOWS

The present value shows today’s value of a future sum of money. If today’s investment of Rs 100 at 10% rate of interest brings in Rs 110 after a year, the latter is the future value and Rs 100 the present value. It means that if future value is found out through compounding, the present value can be calculated through the reverse of compounding. The process in different situations is shown hereunder.

2.3.1 Present Value of a Single Amount

The formula for determining the future value (A1) of an amount of money (P ) is given in Eq. 2.1. Given the future value of an amount (A1) the formula for arriving at its present value (P ) can be derived from Eq. 2.1 and written as follows:

The equation to arrive ...

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