How to Estimate the Present Value of Capital Asset?
The prospective yields of the machine at the end of the first, second, third, fourth and the fifth years are respectively Rs 11,000, Rs 24,200, Rs 26,620, Rs 14,641, and Rs 16,105. Thereafter, the machine turns to scrap and is disposed off to the scrap vendor for Rs 8,052.50. Assuming the rate of discounting to remain stable at 10% throughout the lifespan of the machine, its present value can be determined from equation 5.4 as below:
In general, the present value of a capital asset with a lifespan of ‘n’ years and with the respective annuities of Av A2, A3, …, An at the end of 1, 2, 3, …, n years of its life span, can be computed from equation 5.4 when the rate of discount is stable at ‘r’ and the scrap value of the machine is S.
In case the rate of discount changes from year to year, equation 5.4 can be modified as in Equation 5.6 reproduced below:
Evidently, the method of determining the present value of a capital asset is not much different from that of determining the present value of future income stream discussed in Section 5.2.