Present Value - Explained in Hindi - YouTube

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Namaskar! My name is Mukul and welcome to Asset Yogi.

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In this video, we are going to talk about present value.

This video is part of a video series, in which

we're discussing the time value of money.

In the first video, we had understood the basics of the time value of money.

Then we had made three videos

about future value.

If the future value is a single payment then how is it calculated?

or,

future value has annuity, regular payments at regular intervals.

then how is it calculated?

How is the future value of uneven cash-flows is calculated?

We had also seen that.

So if you want to watch these videos, then you'll get the links in the description.

In this video, we'll learn to calculate the present value.

For example, assume you will get 1 lakhs Rs after 5 years.

So if I ask what will be its value on today's date?

Then how will you calculate?

Or what is this concept?

We'll understand exactly that in this video.

So stay tuned from start to end.

because in the last, in Microsoft excel

how is this calculation done? I'll tell that too.

Let's go straight to the blackboard.

Let's understand the concept of the present value.

Whenever we talk about valuations,

a company's valuation has become this much.

OR we talk about any investment product.

or you have to invest in a project.

You'll get money from that. Let's say you get rent from somewhere.

Then the concept of present value becomes very important.

In fact, it's the most basic of finance.

So understand present value carefully. I'll try to simplify it.

Let's understand it by taking an example.

Assume today is date 0, we're talking about the present.

So take it zero and we'll take it as 1 year.

If I say, either take 10000 RS from me today,

or take 11000 Rs from me after a year.

So which alternative will be better for you?

See, there can be your intuition, that on 10000 you can

earn more money than 11000, so I should take 10000

But there may be some risk in that.

I am saying these 11000 are guaranteed,

you'll get them 100%, no matter what.

So it's possible that 11000 are better for you financially.

So by not going to intuition, if we understand it by calculation,

if we could take it out by calculating,

that which is the better option of the two?

Then taking a decision would be very easy.

So one way is this. Like I talked about in the future value video,

you can take out the future value of this money.

What did we do in the future value?

Assume you grow this money by 7%,

Right! So what will you do? plus 7%. This 10000 you'll

multiply by 1.0,

if you add 7% in it.

So your money, from 10700 Rs

will become 10700 Rs.

Right! If it grows by 7%.

So this 7% here, we're basically assuming

that it's a risk-free rate.

The risk-free rate at which you're growing the money,

we can generally take it as the rate of FD.

If you make an FD in the bank, we can take it risk-free.

So if on today's date, the FD rate is 7%. And by 7%

you're growing the money, then you can make 10700 Rs.

Then you can compare 10700 with 11000.

Right! 10700 is less than 11000. I told you that 11000

you are getting guaranteed. So 11000 for you

is better calculation-wise.

If there are other risks then you can evaluate those.

We are not talking about risk, we are only talking about vanilla calculation.

Let's understand the concept of present value.

In present value, it's completely opposite of the future value.

So 11000 Rs, you'll take out its present value on today's date,

If you take out the present value of 11000 Rs here,

that what will be the present value at date 0.

So how will we calculate that?

You'll do the opposite of it.

You'll divide 10000 by 1.07

So the interest rate of 7% will be called the discount rate.

So this % will basically become your discount rate.

RIght!

So when we calculate compounding,

or in the future value, we multiply by 1.07

in it, we divide by 1.07.

Sorry, it's not 10000, it's 11000 here.

When you divide 11000 by 1.07,

then the value will be 10280 Rs.

SO see, if you compare the value here,

10000 and 10280, then

10280 is also bigger here.

So if you compare the present value. Here we're getting the present value of both.

Because 10280 is greater, then it's a better alternative for you to

take 11000 Rs after one year.

We've removed all risks. SO if you're getting 11000 after one year,

then it's a better alternative calculation-wise.

Now let's see what's the formula.

Like we saw the formula of the future value,

Which is present value into one plus r raised to the power n.

Present value is the value of present date,

(1 + r) is your interest rate.

n is the period for which money was invested.

So similarly, the formula of present value

future value divided by one plus r raised to the power n.

So similarly we calculated that here. The future value is 11000,

Divided by 1 plus 0.07

and n was only one year here.

So it's 1 here. So the calculation comes out to be 10280.

So basically what you have to be careful about,

people get confused about the discount rate. SO what do we take in discount rate?

You have to take a risk-free rate. Don't get confused that 11000 are growing with 10% rate,

so I'll take the discount rate as 10%.

If you take 10%, then you'll come back to 10000. So don't compare it like that.

We have to take discount rate if we invest that money,

risk-free, then how much would we earn?

We'll take that as the discount rate, then our calculation will be correct.

I'll explain it with another example. Let's take another example.

Assume you'll get 1 lakh rupees after 5 years.

We'll take a time period of 5 years.

So it's 5 years here.

The future value is 1 lakh rupees. RIght!

So if you want to get the present value of 1 lakh.

So the interest rate, which is the discount rate, we'll take 7%.

so it'll be 1.07%. As I said we take a risk-free rate of FD in the discount rate.

So let's see how much we get the present value.

So in this case, 100 thousand Rs, means 1 lakh Rs, divided by

1.07. It's 1 plus 0.07. I'll write it again here.

1 plus 0,07, as our formula is.

raised to the power 5.

When you do the calculation, the value comes out as 71299 Rs.

So if you'll get1 lakh rupees after 5 years, then its present value

is 71299 Rs.

Now let's see how we'll do the calculation in Microsoft excel or google spreadsheet?

If you have to do this calculation in Microsoft Excel or Google spreadsheet,

so let's say our future value is 11000Rs,

In 1 year we want the present value,

Discount rate 7% and time period 1 year.

In the second case, 1 lakh was the future value Discount rate of 7% and the time period was 5 years.

So how will you do the calculations?

is equal to PV and open the brackets.

So whatever value it's asking you'll enter those.

It's asking for the rate first, so I'll select the cell of 7%.

I'll add commas and space, we have to select a time period.

I selected the 1 year period.

It's asking for the formula of payment, which is zero.

Payment means if you're getting any regular payment.

For example, you get rent from somewhere or fixed dividends.

So we use this formula in this case.

I'll tell that in the next video. We call it the present value of the annuity.

We'll talk about it in the next video.

You'll make it zero cause you are not getting any regular payment. Right!

We're getting the present value of a single payment.

Here you'll enter the future value after minus, because

it's given here in the bracket too. So you

will enter future value after subtracting and then close the bracket.

So here we got the value of 10280, the same as we saw in the video.

Now let's look at the example of 1 lakh.

Similarly here you'll equal it to PV, open the packet, enter the rate,

after that comma and enter the time period of 5 years.

After that, we said payment is zero here too.

After subtracting the future value we selected this cell.

Closed the bracket, pressed enter. See, similarly

You get the value of 71299. So the calculation is done within seconds,

in Microsoft Excel or Google Spreadsheet.

So this is when we get a single payment.

Assume in future, a single payment

we need its present value, then this formula is used.

And I talked about the concept.

In the next video, we'll see the present value of annuity.

Now, what does the present value of annuity mean?

Assume you get a regular payment from somewhere,

For example, you get rent from somewhere, let's say

your rent comes to be 10000 Rs per month.

Right!

So how will you get its present value?

It's possible that your lease is for 3 years.

So you want to calculate its present value. SO if you have to tell its valuation,

that I am getting this much money from my property.

So what will be its present value?

So how to calculate that? We'll understand in the next video.

Similarly, this 10000 Rs can be your dividend also.

It can be a fixed income of any type, it can be from business too

So we'll understand that in the next video.

Now it's possible that your income is not fixed.

It can be cash flows of different types.

Let's say you get profit or loss in some year in business,

Then how do you calculate the present value?

We call it net present value.

And this net present value is a very important topic.

It requires all the calculations which we call discounted cash flow, valuations.

Company's valuation or property

So watch my video about net present value. So in the next two videos, we'll talk about,

present value of annuity and net present value.

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