present value

Examples of present value in the following topics:

• Present Value and the Time Value of Money

  • The time value of money is the principle that a certain amount of money today has a different buying power (value) than in the future.
  • The time value of money is the principle that a certain amount of money today has a different buying power (value) than the same currency amount of money in the future.
  • Time value of money: (1 + r)t x (the value of the initial investment) = future value; where r is the annual interest rate and t is the number of years.
  • Alternatively, if an investment is valued at $125 and this value includes the 7% return generated over a one year time horizon, the original value of the investment or its present value is equal to (125)/(1.07) or 117.
  • Present value: (the value of the investment at a future time)/(1 + r)n; where r is the annual interest rate and n is the number of years the investment has occurred.

• Cost-Benefit Analysis

  • The guiding principle is to list all parties affected by a project and add a negative or positive value that they ascribe to the project's effect on their welfare.
  • Benefits and costs are expressed in monetary terms, and are adjusted for the time value of money, so that all flows of benefits and costs over time are expressed on a common basis in terms of their net present value.
  • For example, it is very difficult to place a dollar value on human life, consumers' time, or environmental impact.
  • Adjust for inflation and apply the discount rate to calculate present value of the project.

• Economics as a Study of the Allocation of Scarce Resources

  • Ideally, the resources are allocated to their highest valued uses.
  • This requires a valuation or ranking of goods and services from most valued to least valued.
  • The time that a good (or service) is available may affect its value.
  • Economists, accountants and others use the concept of present value to adjust the value of goods (or money) that will be acquired at some point in the future.
  • The distribution of goods among the members of society may also influence the ways in which different goods are valued.

• Austrian

  • The Austrian school of thought provided enormous value to the economic climate, both as a foundation for future economics and as a deliberate counterpoint to more quantitative analysis.
  • Essentially, the price of a good must also incorporate the value sacrificed of the next best alternative.
  • In short, present consumption is more valuable than future consumption (the time value of money).
  • Simply put, more money in the system without a higher demand for that money will drive down the relative value of each dollar.
  • This negates the ideas of socialism common at the time, as communist systems will be unable to identify the appropriate exchange value of each good.

• Calculating GDP

  • There are a few methods used for calculating GDP, the most commonly presented are the expenditure and the income approach.
  • The output approach is also called "net product" or "value added" method.
  • Deducting intermediate consumption from gross value to obtain the net value of domestic output.
  • Net value added = Gross value of output – Value of intermediate consumption.
  • Gross value of output = Value of the total sales of goods and services + Value of changes in the inventories.

• How Corporations Raise Capital

  • Large corporations could not have grown to their present size without being able to find innovative ways to raise capital to finance expansion.
  • But others pay little or no dividends, hoping instead to attract shareholders by improving corporate profitability -- and hence, the value of the shares themselves.
  • In general, the value of shares increases as investors come to expect corporate earnings to rise.
  • Still other corporations, often the smaller ones, prefer to reinvest most or all of their net income in research and expansion, hoping to reward investors by rapidly increasing the value of their shares.

• Theory of Utility

  • For example one person may prioritize flavor while another person may value making healthy choices more.
  • If we could not assume rationality, it would be impossible to say what, when presented with a set of choices, an individual would select.

• Introduction to Ways of Knowing

  • By examining our values, objectives, and methods of achieving those goals, we better understand ourselves, consider other perspectives and hopefully improve the discipline.
  • A brief summary of some of the basic concepts and major contributors is presented here.
  • Methodology is generally seen as the system of values, beliefs, principles and rules that guide analysis within a given discipline.

• How to Compare Economies Throughout History

  • The evolution of trade and the construction of measurement systems, currencies, standards, and the accuracy of historical record present a challenge to economists evaluating economies over time.
  • Specialization refers to the fact that a small group of people performing (and specializing) in different tasks can create substantially more value than every individual learning all tasks (think of Henry Ford's assembly line).
  • During this time frame the Babylonians are credited with generating the first metric to measure economic value (i.e. currency), and standardizing trade through leveraging this metric.
  • Inflation, for example, changes the value of one unit of currency across time, so comparisons across time should be made using Real GDP, a GDP index, or another measure that accounts for changes in price.

• Technology

  • will be presented in the section on Methodology.
  • The values and structure of society are connected to the state of technology.
  • Each of these periods involves changes in ideas, values, knowledge and social institutions.
  • Each stage of technological change may produce or require significant changes in values and social institutions.