About this lesson
Present value and discount factors: what an earn-out is worth today
Present value is a future amount divided by (1+rate)^years. Build a discount factor, =1/(1+$B$1)^A4, and multiply each cash flow by it, or use PV for a single amount: =PV(B1,A6,0,-B6). A dollar later is worth less than a dollar now because today's dollar could be earning a return in the meantime.
Using Google Sheets? Do this lesson in Sheets.
=1/(1+$B$1)^A4What you'll practise
Value the earn-out in a clinic acquisition: build discount factors, discount each payment, add them up, then check one with PV.
4 steps · 40 points · the cells outlined in gold below
- PV
- discount factors
- discount rate
- absolute references
The data
| A | B | C | D | |
|---|---|---|---|---|
| 1 | Discount rate | 9.5% | ||
| 2 | ||||
| 3 | Year | Earn-out ($k) | Discount factor | PV ($k) |
| 4 | 1 | 1,200 | ||
| 5 | 2 | 1,450 | ||
| 6 | 3 | 2,100 | ||
| 7 | ||||
| 8 | Total PV ($k) | |||
| 9 | Year 3 with PV ($k) |