KhanAcademy: Finance: Introduction to Present Value

1
00:00:01,085 — > 00:00:03,070
We'll now learn about what is arguably the most useful concept in finance

2
00:00:04,092 — > 00:00:06,079
and that is called the present value.

3
00:00:09,019 — > 00:00:10,068
And if you know the present value

4
00:00:10,068 — > 00:00:12,044
then it's very easy to understand

5
00:00:12,044 — > 00:00:15,041
the net present value and the discounted cash flow

6
00:00:15,041 — > 00:00:16,085
and the internal rate of return

7
00:00:16,085 — > 00:00:18,034
and we'll eventually learn all of those things.

8
00:00:18,034 — > 00:00:20,069
But the present value, what does that mean?

9
00:00:22,052 — > 00:00:25,003
Present value.

10
00:00:25,003 — > 00:00:29,044
So let's do a little exercise.

11
00:00:29,044 — > 00:00:32,050
I could pay you a hundred rand today.

12
00:00:32,050 — > 00:00:37,021
So let's say today

13
00:00:37,021 — > 00:00:42,000
I could pay you one hundred rands.

14
00:00:42,000 — > 00:00:50,047
Or (and it's up to you) in one year, I will pay you

15
00:00:50,047 — > 00:00:58,060
I don't know, let's say in a year I agree to pay you 110 rands.

16
00:00:58,060 — > 00:01:00,079
And my question to you

17
00:01:00,079 — > 00:01:02,070
and this is a fundamental question of finance

18
00:01:02,070 — > 00:01:04,036
everything will build upon this

19
00:01:04,036 — > 00:01:06,079
is which one would you prefer?

20
00:01:06,079 — > 00:01:08,000
and this is guaranteed.

21
00:01:08,000 — > 00:01:10,020
I guarantee you, I'm either going to pay you R100 today

22
00:01:10,020 — > 00:01:14,021
and there's no risk, even if I get hit by a truck or whatever.

23
00:01:14,021 — > 00:01:16,050
This is going to happen, if the Earth exists, I will pay you R110 in one year.

24
00:01:21,009 — > 00:01:24,014
It is guaranteed, so there's no risk here.

25
00:01:24,014 — > 00:01:25,040
So it's just a notion of

26
00:01:25,040 — > 00:01:28,037
You're definitely gonna get R100 today, in your hand

27
00:01:28,037 — > 00:01:34,029
or you're definitely gonna get R110 one year from now.

28
00:01:34,029 — > 00:01:35,050
So how do you compare the two?

29
00:01:35,050 — > 00:01:38,020
And this is where present value comes in.

30
00:01:38,020 — > 00:01:39,090
What if there were a way

31
00:01:39,090 — > 00:01:41,098
to say, well what is R110

32
00:01:41,098 — > 00:01:45,004
a guaranteed R110 in the future?

33
00:01:45,004 — > 00:01:46,020
What if there were a way to say

34
00:01:46,020 — > 00:01:49,020
How much is that worth today?

35
00:01:49,020 — > 00:01:52,020
How much is that worth in today's terms?

36
00:01:52,020 — > 00:01:54,070
So let's do a little thought experiment.

37
00:01:54,070 — > 00:01:57,044
Let's say that you could put money

38
00:01:57,044 — > 00:02:00,055
in some, let's say you could money in the bank.

39
00:02:00,055 — > 00:02:02,059
And these days, banks are kinda risky.

40
00:02:02,059 — > 00:02:05,040
But let's say you could put it in the safest bank in the world.

41
00:02:05,040 — > 00:02:09,061
Let's say you could put it in government treasuries

42
00:02:09,061 — > 00:02:11,040
which are considered risk free

43
00:02:11,040 — > 00:02:15,004
because the SA government, the treasury

44
00:02:15,004 — > 00:02:17,080