Probabilistic interpretation of the present value of cash flow

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Abstract


The question of assessing the current value of the flow of future earnings in the scientific literature worked out very carefully. A key factor in assessing a discounted rate, usually defined as the weighted average cost of capital invested. However, it is possible different perspective on the relationship between the present value of money and its nominal amount, receipt of which is to be in the future. This paper proposes a new approach to the assessment procedure, the current value of the flow based on a probabilistic model in which the relation between the current and future nominal values defined as the confidence level in obtaining value in the future. Application of this model provides a natural way to introduce a quantitative measure of risk for the flow of future earnings. The paper analyzes the properties of the proposed measures of risk, shows its conformity with classical ideas of the relationship between risk and return investments, are examples of the calculation of absolute and relative indicators of the potential flow.

About the authors

I A Smarzhevsky

Peoples' Friendship University of Russia

Email: ivsmrudn@yandex.ru <mailto:ivsmrudn@yandex.ru>
Peoples' Friendship University of Russia

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Copyright (c) 2016 Economics



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