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Calculation of the
present value of the cash flows
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The Present Value
Discount factor is derived according the following formula:
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PVfactor = 1
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(1+R)N
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Where:
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N Year of analysis
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R Interest Rate (IRR)
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PVfactor Present Value
Discount Factor
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The Annual Cash Flow
multiplied by the Present Value Discount Factor results in the present value
for that cash flow. The sum of these
present values must equal the Total Investment when
discounted at the Required IRR, if the proper Indicated Value has been
selected.
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That the Total
Investment is equal to the sum of the present values of each cash flow is proof
that the correct Indicated Value has been selected.
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