Dear Harrel, thank you for you inquiry. Present value is the value on a given date of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk. Present value calculations are widely used in business and economics to provide a means to compare cash flows at different times on a meaningful "like to like" basis.

Calculation

The most commonly applied model of the time value of money is compound interest. To someone who has the opportunity to invest an amount of money C for t years at a rate of interest of i% (where interest of "5 percent" is expressed fully as 0.05) compounded annually, the present value of the receipt of C, t years in the future, is:

    C_t = C(1 + i)^{-t}\, = C / {(1+i)^ t} \

The expression (1 + i)−t enters almost all calculations of present value. Where the interest rate is expected to be different over the term of the investment, different values for i may be included; an investment over a two year period would then have PV (Present Value) of:

    \mathrm{PV} = C(1+i_1)^{-1}\cdot(1+i_2)^{-1} \,

Present value is additive. The present value of a bundle of cash flows is the sum of each one's present value.

In fact, the present value of a cashflow at a constant interest rate is mathematically the same as the Laplace transform of that cashflow evaluated with the transform variable (usually denoted "s") equal to the interest rate. For discrete time, where payments are separated by large time periods, the transform reduces to a sum, but when payments are ongoing on an almost continual basis, the mathematics of continuous functions can be used as an approximation.

Choice of interest rate

The interest rate used is the risk-free interest rate. If there are no risks involved in the project, the expected rate of return from the project must equal or exceed this rate of return or it would be better to invest the capital in these risk free assets. If there are risks involved in an investment this can be reflected through the use of a risk premium. The risk premium required can be found by comparing the project with the rate of return required from other projects with similar risks.

Thus it is possible for investors to take account of any uncertainty involved in various investments.

Regards,

Agoracom Investor Relations