How Present Value Helps You Decide What To Pay
In a hurry:
Apply it today:
Present Value equals the value, today, of a future stream of cash flows
Investors, lenders and appraisers use it to decide how much to offer, lend or value
By the end of this episode you’ll learn:
What is it?
How is it calculated - in concept?
How is it calculated - long-hand?
How is it calculated – short-hand (the =NPV() function)
How is it applied?
Have a few minutes:
Ah, present value, my old friend. Dependable and honest, always there when I need you. You’ve been around for thousands of years and you never disappoint.
Present value is one of the cornerstones of finance and time value of money principles. It is the theory that helps us determine today’s value of all of tomorrow’s cash flows.
For example, if you were the lucky winner of a $100,000,000 lottery (congratulations) but you needed to wait 100 years to collect the winnings, how much are those winnings really worth to you today? Less I’m sure, but how much less?
The theory of present value and the process of present value discounting is key to commercial real estate analysis and the backbone of every investor’s crucial question: “how much should I pay for that property?”
This is the first episode of a multi-part series where we introduce the topic of present value within the context of commercial real estate.