The Value of Money in the Future

How do you decide whether to pursue a project or buy a piece of production machinery? You do a cost-benefit analysis. You look at the costs incurred and the revenues that will be created. If the revenues are greater than the costs then you should go ahead.

Or should you?

Let’s consider the purchase of a machine to make a new product. Would you count the revenues that are produced from the product in 3 years’ time as being worth the same as revenues this year? Probably not – because if you had the money this year, you could invest it. Furthermore, there is a greater risk attached to the revenues forecast for Year 3.

So how do I convert the future revenues into their value today?

That’s what this video is about.

The spreadsheet file below has 4 tabs:

  • a table and chart showing the present value of $1,000 at different discount rates in different years
  • an activity for your to calculate the present value of different sums
  • the answer to the activity
  • the sheet you saw in the video


Click to Download Present Value File (Excel)