Question

"Present value equals the present value of all cash flows accruing to the asset's owner". do you agree to this? why or why not?

Answer 1

Yes, present value (PV) of an asset is sum of all cash flows discounted to its present value. The value of asset is derived by its future cash flow related to the asset. Therefore present value equals the present value of all cash flows accruing to the asset's owner. Formula used to present value calculation is as follows

Present value (PV) of asset = [Expected cash inflow/ (1+ Discount rate) ^n]

= CF1/ (1+r) ^1 + CF2/ (1+r) ^2 + CF3/ (1+r) ^3….. CFn/ (1+r) ^n

Where,

Time period n = 0, 1, 2, 3…….so on

Discount rate is r

Expected cash inflow are CF1, CF2, CF3,…….so on at time 1, 2,3,……so on respectably