Exch.Rate & PV Factor
When a person earns income in various currencies such as INR, USD, BHD, and Euro, they cannot simply add these amounts together because each currency has a different value and purchasing power. To accurately determine their total income, they must convert all earnings into a common currency using exchange rates. Exchange rates show the relative value of one currency against another, ensuring a consistent and accurate representation of total income.
Similarly, cash flows from a project at different times cannot be directly added, even if in the same currency. This is due to the changing value of money over time because of inflation and other economic factors. The Present Value (PV) factor is used to adjust future cash flows to their value in today's terms. By discounting future cash flows, we can make a more accurate assessment of a project's financial viability.
In both cases, whether using exchange rates to convert different currencies or using PV factors to adjust future cash flows, the goal is the same: to enable accurate aggregation and informed decision-making. Both methods account for differences in value over time or between different monetary units, allowing for clearer and more comparable financial analysis.
By CA L.Muralidharan and CPA L.Mukundan
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