How can we find the net present value of an asset that does not generate returns
How We Can Calculate Present Value Of Assets?
Capital goods are durable assets that produce a stream of rentals or receipts over time. If you own an apartment building, you will collect rental payments over the life of the building, much as the owner of a fruit orchard will pick fruit from the trees each season.
Suppose you become weary of tending the building and decide to sell it. To set a fair price for the building you would need to determine the value today of the entire stream of future income. The value of that stream is called the present value of the capital asset.
The present value is the dollar value today of the stream of income over time. It is measured by calculating how much money invested today would be needed, at the going interest rate, to generate the asset's future stream of receipts.
Let's start with a very simple example. Let's say somebody offers to sell you a bottle of wine that matures in exactly 1 year and can then be sold for exactly $11. Assuming the market interest rate is 10 percent per year, what is the present value of the wine, that is, how much should you pay for the wine today? Pay exactly $10, because $10 invested today at the market interest rate of 10 percent will be worth $11 in 1 year. So the present value of the next year's $11 wine is today $10.
Suppose you become weary of tending the building and decide to sell it. To set a fair price for the building you would need to determine the value today of the entire stream of future income. The value of that stream is called the present value of the capital asset.
The present value is the dollar value today of the stream of income over time. It is measured by calculating how much money invested today would be needed, at the going interest rate, to generate the asset's future stream of receipts.
Let's start with a very simple example. Let's say somebody offers to sell you a bottle of wine that matures in exactly 1 year and can then be sold for exactly $11. Assuming the market interest rate is 10 percent per year, what is the present value of the wine, that is, how much should you pay for the wine today? Pay exactly $10, because $10 invested today at the market interest rate of 10 percent will be worth $11 in 1 year. So the present value of the next year's $11 wine is today $10.
The calculation of value in use should reflect the following elements: [IAS 36.30]
-an estimate of the future cash flows the entity expects to derive from the asset
-expectations about possible variations in the amount or timing of those future cash flows
-the time value of money, represented by the current market risk-free rate of interest
-the price for bearing the uncertainty inherent in the asset
-other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset
-an estimate of the future cash flows the entity expects to derive from the asset
-expectations about possible variations in the amount or timing of those future cash flows
-the time value of money, represented by the current market risk-free rate of interest
-the price for bearing the uncertainty inherent in the asset
-other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset