Present value

The present value of a cash flow, or a stream of cash flows, its its values adjusted for the time value of money, and for risk. As discussed at length when considering DCFdiscounted cash flow valuation in general (and the specifics of the required calcualtions) this is the most fundamentally correct method of valuation, and most other fundamental valuation methods can regarded as indirect applications of it, or approximations to it.

Understanding the concept of present value, and DCF valuation is therefore critical to understanding the key concepts of finalcial theory and valuation.

Unlike an NPV, a present value does not include any initial set up or acquisition costs, and therefore commonly includes only positive cash flows.

When present values are calculated at the company level, then the usual discount rate is the WACC, whereas for a security it should be the cost of capital for that type of security (e..g. cost of equity, or cost of (that grade of) debt. This may be calculated using models such as CAPM

It may sometimes be easier to calculate an adjusted present value, depending on what data is available.

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