HomeAccountingManagementAccountingPresentValueFactorCalculation|Stepsinvolved|CalculatorStepsinvolvedincalculationofPresentValueFactor(P.V.F)Thefollowingstepsareinvolvedinthepreparationofpresentvalue1.Cashoutflowsofthefirstyearistakenasitissincethecashoutflowsofonerupeeisequaltoonerupee.2.Cashinflowsfordifferentperiodsareconsideredascashreceivedaftertaxbutbeforedepreciation.3.Cashinflowsisconsideredforfulleconomiclifeoftheproject.4.Thesalvagevalueorscrapvalueoftheprojectisconsideredascashinflows.5.Bothcashinflowsandcashoutflowsshouldbediscountedatapredetermineddiscountrate.6.Generally,costofcapitalofafirmisconsideredasdiscountrate.Itisotherwisecalledascut-offrate.7.Ifthemanagementwishesthediscountrateisotherthanthecostofcapital,thedecisionofmanagementisfinal,suchrateistakenasdiscountrate.Inthiscase,generally,discountrateissomewhathigherthanthecostofcapital.8.Thepresentvaluefactorisidentifiedwiththehelpofdiscountrate.FormulatocalculateP.V.FThefollowingformulaisusedtofindthepresentvaluefactor.P.V.F=Where,P.V.F=PresentValueFactorr=DiscountRaten=NumberofyearsThefollowingexampleclearsthecalculationofpresent-valuefactor.Discountrateis12%.Numberofyearisthree.Thepresentvaluefactoris0.7120.712meansmeansthatRs.1000receivableafter3yearsisequaltoRs.712today.Inotherwords,Rs.712investedtodayat12%willbringRs.1000afterthreeyears.9.Then,thepresentvalueofcashinflowsfordifferentvaluesarecalculatedwiththehelpofpresentvaluecalculatorat12%.10.Thecashoutflowsatsubsequentperiodsarediscountedatthesamerateofpresentvaluefactor.Thepresentvalueoftotalcashinflowsshouldbecomparedwiththepresentvalueoftotalcashoutflows.Ifthepresentvalueofcashinflowsaregreaterthan(orequalto)thepresentvalueofcashoutflows(orinitialinvestment),theprojectwouldbeaccepted.Ifnotso,thentheprojectwillberejected.Referthispage:CalculatorsAtoZformorefinancialcalculators.RelatedPostsTags:capitalbudgeting,managementaccountingSubscribenowRecentPostsWeaknessesofTradeUnionMovementinIndiaandSuggestiontoStrengthenAuditPlanning&Develop