Any accounting geeks?

Mazeroth
Mazeroth Posts: 1,585
edited February 2009 in The Clubhouse
Doing some homework and can't, for the life of me, figure this easy one out:

What is the present value factor for a cash outflow that is made today?
0.00
some value greater than 1.00
1.00
It depends on the rate of return that is required.

Many thanks in advance.
Post edited by Mazeroth on
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  • kn505
    kn505 Posts: 380
    edited February 2009
    The present value factor is based on the interest rate and the time. Since the time is zero, the present value factor would be 1 in regardless of the required rate of return. If you rephase the question as "what is the present value for $100 payment made to you today?", the answer would be $100. Therefore, the present value factor would then be 1. If $100 will be paid to you tomorrow instead, then the present value factor would be depended on the required rate of return.
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  • Gaara
    Gaara Posts: 2,415
    edited February 2009
    Yep KN505 is right. Think of present value just like it sounds, what is the amount currently worth. You have $50 in your bank account right now, what is the present value? Well...$50.

    Now if it was the present value of $50 ten years from now, then you would have to factor in the interest rate, if it was compounded, etc.

    If you need to do that for any ?s there are a few calculators on investopedia.com which are good, and Excel can compute PV and FV calculations, of normal amounts or annuities.
    The Basement HT
    PC Rig
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  • kn505
    kn505 Posts: 380
    edited February 2009
    The "cash outflow" in the question bothers me. If it is understood as the "investment" you has made today for an expected higher payment in the future, then the answer to the question is it depends on the required rate of return. I think this is the answer that they are looking for.
    Is this for an accounting or finance class?
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  • Gaara
    Gaara Posts: 2,415
    edited February 2009
    kn505 wrote: »
    The "cash outflow" in the question bothers me. If it is understood as the "investment" you has made today for an expected higher payment in the future, then the answer to the question is it depends on the required rate of return. I think this is the answer that they are looking for.
    Is this for an accounting or finance class?

    I think you are reading to much into it. A cash inflow or outflows present value that is made the same day is 1. It doesn't matter what the money is being used for or what the rate is, the current value of 1 dollar is 1 dollar.

    If they were asking the FV of the amount, then it would matter, or the PV of $1 10 years from now.
    The Basement HT
    PC Rig
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