The concept of present value gives the value of the present amount of money in contrast to the future value it will bring when it is invested at compound interest.
Advantages of Present Value
It is used in profitability analysis of an investment in a given business enterprise. The concept of present value is important in the analysis of the money that can be generated from each product produced by the business enterprise. The value is calculated through compound interest to identify the profit that will result after a given period, and this is calculated for every commodity in the market, and the overall profit of the business is defined.
It considers the cost of capital and risk that will result in future. It gives the business organization the ability to project the flow of cash of a period of 5 to 10 years which will indicate less impact on the net present value compared to the predicted cash flow. The consideration of cash flow, therefore, enables the putting measures in place that will result in the present or future capital that will not amount to the predicted cash flow thus the business organization can have an alternative to mitigate risk.
Use to measure the value of the investment. The business group and the investor are always interested in the value of the company after a given period, and the ultimate business target is to increase the value simultaneously overtime. The concept of present value is, therefore, use to measure the possibility of the investment will add value to the company or not, and the primary objective is always to increase business value.
