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PRESENT VALUE OF ASSETS

Capital goods are durable assets that produce a stream of rentals or receipts over time. If own an apartment building. roll will collect rental payments over the life of the building, much as the owner of a fruit orchard will pick fruit from die 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 dollar value today of a stream 01 income over time. It is measured by how much invested would be needed at rlu- going interest rate, to generate future stream of receipts, Let’s start with a very simple example. Let’s iay somebody offers to sell you a battle of wine that matures in exactly 1 year and can then be sold for exactly \$11. Assuming the market interest rate is 10 percen t per year, what is the presen t value of the winethat 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 next year’s Wine is ‘today \$10.

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