The final value method is an investment calculation. It works dynamically and accrues interest on the deposits and withdrawals of an investment in a certain period of time.
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Definition / explanation
With the full-scale method, various investments are compared with one another. It calculates what additional net profit can be achieved with various investments. It must be ensured that the same period is used for the calculation.
Vergleichsgrundlage für die Entscheidung ist dann der sogenannte Endwert und nicht der Barwert, wie es bei der Net present value method üblich ist.
Values for calculating a final value:
EWM. = Final value with investment
EW0 = Final value without investment (= equity capital employed)
FK0 = Borrowing at the beginning of the investment
n = useful life of the investment property
i = discount rate
q = 1 + i
a0 = Rate at the beginning of a year
at = Rate at the end of a year
At the beginning, the “final value for the company with the investment” and the “final value for the company without the investment” must be calculated. '
In words, this means that every single excess payment is compounded at the end of its useful life. In order to obtain the final final value, these individual final values are summed up. If the result is a negative value, it is not advisable to invest.
Areas of application of the final value method
The full-scale method is used to compare various investment opportunities. The aim is to find out which investment generates the most profit.