Introduction to Corporate Finance - Coursera
main
main
  • Introduction
  • Corporate Finance - An Introduction
  • Time Value of Money
    • Discounting
    • Compounding
    • Annuity
    • Growing Annuity
    • Perpetuity
    • Growing Perpetuity
    • Taxes
    • Inflation
  • Interest Rates
    • APR and EAR
    • Term Structure
  • Discounted Cash Flow
    • Decision Making
    • Free Cash Flow
    • Forecast Drivers
    • Forecasting Free Cash Flow
    • Sensitivity Analysis
Powered by GitBook
On this page

Was this helpful?

  1. Time Value of Money

Discounting

PreviousTime Value of MoneyNextCompounding

Last updated 4 years ago

Was this helpful?

Discounting is the process of moving CFs back in time.

Once all the CFs are moved back in time to timestamp 0, they can be aggregated (added/subtracted).

Present Value PVt(CFi)PV_t(CF_i)PVt​(CFi​) is the present value of the cash flow CFiCF_iCFi​ at a previous timestamp t. The moved back CFs denote the present values of the cash flows today i.e. at timestamp 0.

Simple Example

How much do you have to save today to withdraw $100 at the end of each year for the next 4 years,
if you can earn 5% per annum?

The first step is to place the CFs on the timeline:

Now, calculate their present values (at timestamp 0) by discounting:

Now, simply aggregate the present values:

Thus, we need to save $354.60 today to be able to withdraw $100 at the end of each of the next 4 years, earning 5% per annum.