PVR Full Form

PVR Full Form


Introduction

Present value Ratio is the concept that states an amount of money today is worth more than that same amount in the future. In other words, money received in the future is not worth as much as an equal amount received today.

Receiving Rs.1000 today is worth more than Rs.1000 five years from now. Why? An investor can invest the Rs.1000 today and presumably earn a rate of return over the next five years. Present value takes into account any interest rate an investment might earn.

Inflation and Purchasing Power

Inflation is the process in which prices of goods and services rise over time. If you receive money today, you can buy goods at today's prices. Presumably, inflation will cause the price of goods to rise in the future, which would lower the purchasing power of your money.

Money not spent today could be expected to lose value in the future by some implied annual rate, which could be inflation or the rate of return if the money was invested. The present value formula discounts the future value to today's dollars by factoring in the implied annual rate from either inflation or the rate of return that could be achieved if a sum was invested.

 

Advantages of Present Value Ratio

Using present value is a quick and easy way to assess the present and future value of an investment. Investors can use the calculation to get a quick overview of the situation and whether it would be a good idea to invest money today, assuming a consistent annual rate of return. Essentially, present value is an effective way of comparing investment decisions or purchase decisions. This is done by evaluating the future sums of money in the present day. 

Disadvantages of Present Value Ratio

The present value formula assumes that you are earning an expected forgone rate of return over a predetermined period of time. This can make present value a misleading statement. 

For example, if you were to invest in a company, the assumed rate of return could end up changing in each of the following three years. This could be due to a number of factors such as volatility in the industry or market. In the case of not having a consistent rate, it wouldn’t be so easy to calculate the present value because you wouldn’t be able to use a realistic annual rate of return. 

Summary

Present value ratio is a quick and easy way to get a good idea of the value of a sum of money or cash flow. However, the ease comes at the cost of accuracy which can lessen the financial benefits.

Many things can affect investments – such as inflation. So make sure that you use other metrics alongside present value to get the best idea possible.