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Present Value

  • Present value is the present discounted value of the future net cash inflows that the asset is expected to generate in the normal course of business
  • Liabilities are carried at the present discounted value of future net cash outflows expected to settle the liabilities in the normal course of business

Example: Shahid purchased a machine on 01-04-2002, and it is supposed to generate cash at ₹ 50,000 p.a. for the next 10 years at the rate of 10% p.a. The present value of future cash flows will be calculated as follows:

 

Solution:

 

= ₹ 45,455

Similarly,

Where
PV = Present value

n = Number of years

I = Rate of interest

A = Amount

Time of receipt

Money value ()

Present value ()

31-03-2004

50,000

41,322

31-03-2005

50,000

37,565

31-03-2006

50,000

34,151

31-03-2007

50,000

31,046

31-03-2008

50,000

28,224

31-03-2009

50,000

25,658

31-03-2010

50,000

23,325

31-03-2011

50,000

21,205

31-03-2012

50,000

19,277

Total

 

3,07,228

Total of all these present values is ₹ 3,07,228.

The machine purchased by Mr. X has to be valued at its present value of ₹ 3,07,228.

Illustration 1

A Ltd. purchased a machine for ₹ 50,000 on 01-04-2010

  1. A similar machine could be purchased for ₹ 60,000.
  2. The same machine could be disposed off for ₹ 40,000.
  3. The present discounted value of the future net cash inflows that the machinery was expected to generate in the normal course of business is calculated at ₹ 75,000.

It signifies the following

  1. Historical cost is ₹ 50,000
  2. Current cost is ₹ 60,000
  3. Realizable value is ₹ 40,000
  4. Present value is ₹ 75,000





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