Purely discounted income - the expected value of the flow of payments, which is reduced to the cost at a particular point in time. Often, this value is calculated during the analysis of economic efficiency in the field of investment for future income.
What is discounting?
It is necessary to define such a concept as discounting. This is a reduction to a certain fair value, which is carried out at a certain rate. Purely discounted income must be calculated to reflect the real amount of money available to the entity today, but taking into account the impact of various factors in the future. Such calculations are based on the following reasons:
- investing this amount in other profitable operations in order to obtain some profit in the future;
- decreased purchasing power of cash and inflation;
- the risk of not receiving the expected profit.
Profitability: its internal rate
Purely discounted income is the basis for calculating the rate of return, which gives a description of the return on investment. The internal rate of return is equal to the discount rate, in the presence of which the income becomes equal to zero.
Net present value: formula
Revenues from cash flows are mainly summed up within specific time periods (every month, quarter and year). In other words, the total cash flow equals their sum at all the specific steps.
The higher the purely discounted income, the more efficient the project. If it is negative, the investor may suffer losses (low efficiency).
Profit monitoring
The marketing system at any enterprise creates all the conditions for its effective activities in order to increase profits. However, all necessary costs that a business entity may incur must be taken into account. Thus, any predicted profit from the implementation of a project is in the form of the difference in income from its work on perception and without its use.
Example of determining net present value
At enterprises with various types of activities, self-respecting managers instruct their specialists to calculate the net present value. An example widespread in this area of calculation is advertising agencies.
The bulk of advertising revenue is made up of monetary resources that come from the advertisers themselves. With the introduction of a new project, the amount of revenue should increase. Moreover, the calculation of the economic effect comes down to summing up the cost of advertising messages received for the services of their placements. With the use of mechanisms of a new quality of positioning (for example, online advertising), the image and popularity are strengthened. With an increase in the rental price of the space used for advertising, or an increase in the cost of advertising itself, it makes sense for the heads of advertising agencies to change the price scheme for its placement and introduce, for example, payment for each attracted client.