Present value can be defined as the value of any product or money in the current date that would be required to produce a future value of that specific product or service with a prevailing rate of return. Our assignment help experts says that Present value is mainly calculated through discounting a series of future cash flows. Compounded interest rate is used for discounting the cash flows.
Role of Present Value: Both present value and future value plays vital role in the management of businesses as they reflect the time value of money and other investment risks. Present value plays a great role in decision making process of organization as it provides organization with the information of investment that organization would need to invest in order to get desired results. It helps organization to make cost-effective investments by analyzing the necessary factors that could affect the success of such investment. Valuable insight of the future is being accumulated with the help of present value. In order to manage the business effectively, it is important for organizations to have knowledge of the opportunity cost involved with its projects. With present value organizations unable to determine opportunity cost that would be faced for a project. At the same time, it also helps organization with the decision that whether a project is profitable or not. With the help of present value, organization makes effective forecasting and business planning. Forecasting and planning is important aspect of business and without these, it is very difficult to ensure smooth functioning of business.
With the help of present value, organization can make effective forecasting that would ultimately help in effective planning. It makes organization aware of the requisite changes in its investment or process to acquire the desired results and thus helps in effective management of organization. It further provides organization with the systematic framework from which it would be easy for organizations to understand and implement decisions contributing in organization’s smooth functioning. The knowledge of present value would contribute in the information related to income derived from an investment. It would provide organization with the information whether the investment made was successful or not. At the same time, it also suggests requisite changes in the process and structure that organization should implement to generate maximum return from such investment. It has become an important medium for organizations to calculate the worth of their investment and the changes required to improve this worth. Long-term planning could be made with the knowledge of present value to compete in the market.
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