Actualization

The actualization is the method which is used to bring back on the same basis of financial flows not directly comparable which occur on different dates. That not only makes it possible to compare them but also to carry out on them arithmetic operations.

Principle: The value time of the money

See also: Value time of the money

Actualization is founded on two basic principles:

• the preference for the immediate Pleasure
• aversion with the risk

The first principle is often confused in what one names the " cost of the temps" in opposition to the second principle corresponding to the " cost of the risque".

The cost of time reflects the fact that one euro of tomorrow is worth less than one euro of today. In finance, the cost of time is materialized by the curve of the rates known as " without risque" (for example, the outputs of the Government loans are generally regarded as good approximations of the rates without risk). Indeed an euro today can be invested and bring back more than one euro tomorrow.

The cost of the risk, as for him, reflects the fact that one euro unquestionable is worth more than one euro hoped but dubious. In finance, the cost of the risk is materialized by the " precede risque" who is added to the rate without risk to constitute the awaited output of a risky credit (like an action or an obligation).

Concept of actualization in finance

In practice, two rates are used to measure the evolution of the value of the money: - the concept of Taux without risk which covers the cost of time (in general one takes as reference market rates of the loans of a solvent state). - concept of Allowance for risk which covers uncertainties related to anticipations of future incomes, or more precisely the price of the aversion to these uncertainties (Aversion with the risk).

Method of calculating

To bring up to date the value of flow or incomes occurring on different dates in time consists in calculating their value on a date given using an up-dating rate. The values obtained are called values present or brought up to date values.

$VA\; (F)\; =\; E\; (\{F\}).\; (1+t)\; ^\; \{-\; X\}\; \backslash ,\; \backslash !$
where

• $VA\; (F)\; \backslash ,\; \backslash !$ represents the brought up to date value of flow
• $E\; (F)\; \backslash ,\; \backslash !$ is the mathematical Espérance future flow $F\; \backslash ,\; \backslash !$, at the time where it will be available
• $t\; \backslash ,\; \backslash !$ is the up-dating rate or its particular case, the Annual percentage rate
• $x\; \backslash ,\; \backslash !$ is time, expressed of many years, of the date of actualization at the date of flow.

Generally, the date of selected actualization is the current date. One speaks then about current value rather than of brought up to date value.

In practice, actualization is used to measure the relevance of the choice of an investment, with two frequent questions:

1. to measure the profitability of a credit whatever it is: Is the purchase of a machine profitable, in other words, which it is likely to pay to me in the future covers it its purchase price?
2. to choose between several possible investments: Is it to better buy such machine rather than such other, knowing what each one costs today and what they are likely to pay in the years to come?

Valorization by actualization thus rests on two essential components: the evaluation of future flows, and the up-dating rate.

Evaluation of future flows

There exist situations where future flows are perfectly known in advance: obligations withfixed rate, interests of fixed interest-rate loan.

In the other cases, future flows are by definition hypothetical. The techniques of evaluation of future flows are complex and depend on the nature of the investment. For example,

• for an industrial machine, one will evaluate his production capacity which one will transform into commercial value;
• to estimate the value of a company or its action, one will anticipate the future results, according to its commercial, technological competences and of financial criteria (structure of the assessment, contracts in progress, debt, treasury available, etc)

Up-dating rate

The choice of the up-dating rate is a key variable of valorization by actualization and can strongly change the result. The generally selected rate reflects the cost of the capital, it will thus take the Interest rate market for one comparable duration, or possibly of the Rate of inflation anticipated, possibly increased of a Allowance for risk.

In the case of actualization of financial values, one takes for reference market rate

• that of the Money market for the short durations,
• and that of the goods or obligations of the Treasury for the longer durations.

Concept of actualization of accountancy

In accountancy, actualization is a countable method intended to compensate for the consequences of the Inflation in the contracts.

Contrary to the revision, it is carried out only once at the beginning of contract and not each month. In France, for the government contracts, these two methods are exclusive one of the other.

See too

Related articles

• Capacité of self-financing
• Capitalisation
• Discount coefficient
• Investissement
• Patrimoine (finance)
• Discount rate
• Rate of profitability interns
• Annual percentage rate
• clear Current value
• Valeur time of the money

External bonds

• How to evaluate/bring up to date a financial credit

• Value of a company with the method of actualization

Random links:

Rhys ap Gruffydd | VxWorks | Chelidae | District of Detmold | Aphodiidae | Milburn Stone | Faucon_RQ-4_global

© 2007-2008 speedlook.com; article text available under the terms of GFDL, from fr.wikipedia.org