If someone offers Company A THB 450,000 one year from now, can we compare it directly with an expense today? We first need a time basis and a required return appropriate to the risk. This episode introduces the calculation before using it to judge an entire project.
For the calculation, assume a 9.12% annual discount rate for nominal, after-tax baht cash flows received at year-end. Episode 6 will construct this hypothetical rate. It is not a Thai business benchmark or a guaranteed investment return. For now, the task is to use a supplied assumption consistently.
Money at different dates differs because of waiting and alternative uses of funds. Discounting puts those amounts on a common date so they can be compared. It does not mean future money physically disappears, nor does a mathematical discount automatically account for every uncertainty affecting whether the payment will actually arrive.
Draw the timeline before using a formula
Let today be time zero and the end of the first year be time one. Do not mix monthly periods with an annual rate. If payment actually arrives midyear, a year-end assumption is an approximation that should be stated. Monthly receipts require a compatible periodic rate and a timeline reflecting their actual dates.
The present value of a single future payment equals the payment divided by one plus the rate, raised to the number of periods. THB 450,000 at the end of year one is divided by 1.0912 once. A payment at the end of year three is divided by 1.0912 cubed, because the waiting period is longer.
Moving in the opposite direction, today’s money multiplied by one plus the rate for each period gives future value. Compounding moves forward; discounting moves back to the chosen valuation date. They are inverse operations under the same rate and timing assumptions, not unrelated formulas to memorize independently.
Discount the project payments one year at a time
The project introduced next has net cash flows of THB 450,000 at the end of year one, THB 450,000 at the end of year two, and THB 650,000 at the end of year three. The last payment includes THB 200,000 released from working capital. Episode 5 will explain the initial investment and operating assumptions.
Calculate 450,000/1.0912 + 450,000/1.0912² + 650,000/1.0912³. The total is approximately THB 1,290,578.63. This is the present value of future cash receipts under the stated assumptions. It is not yet net present value, because the expenditure at time zero has not been deducted.
Do not compare total undiscounted receipts of THB 1,550,000 with today’s investment and forget timing. The undiscounted total is useful for checking arithmetic and understanding nominal receipts. Present value answers a different question: what amount at the selected date is financially comparable under the assumed required return and timing?
- Present value, year 1412.39
- Present value, year 2377.92
- Present value, year 3500.27
PV = CF ÷ (1 + 9.12%)t
Make the rate, units, and risk consistent
Cash flows including expected inflation should be matched with a nominal rate; inflation-adjusted flows require a real rate. Currency must also match. Do not apply a dollar discount rate to baht flows without a justified conversion framework. Check the tax basis as well, rather than combine pretax cash and an after-tax rate by habit.
A higher rate reduces the present value of a given positive future payment. Arbitrarily adding a large risk premium is not a substitute for analysis, however. Understand which risks are reflected in the forecast and which are reflected in the required return, so that caution does not become unexplained double counting.
The related article Count the Cash Across the Whole Investment develops investment timing. OpenStax’s NPV chapter shows how dated flows are brought to a common point. Our fictional cash figures are original exercises, not the textbook’s business case.
An exercise that checks the timing logic
If THB 450,000 moves from the end of year one to the end of year two without changing amount, does present value rise or fall? It falls, because it is divided by another factor of 1.0912. This answer relies on the positive rate in our exercise; always state the assumptions rather than memorize a slogan detached from the calculation.
Does a present value of THB 1,290,578.63 establish that the project should proceed? Not yet. We still need the initial cost, the assumptions generating those flows, their risks, and funding availability during execution. A present-value calculation can be perfectly correct while the business inputs are incomplete or implausible.
Before moving on, draw a timeline that another person can understand without hearing the whole discussion. Label amounts, currency, period, payment date, and rate basis. Once that structure is clear, the next task is choosing which cash movements belong in the investment model, rather than collecting every number available and hoping the spreadsheet resolves the ambiguity.