This is true. We don’t know how much money we have in our bank account, or how much we put out each month, but we can calculate what the next few years are going to look like by simply multiplying the present value of our cash flow, which is the sum of all our current assets minus all our liabilities, by the current value of our assets, which is the sum of all of our current assets minus all of our liabilities.
The formula is fairly simple, and it is pretty accurate at estimating future cash flows. To get an idea of how accurate it is, I’ve used the example of a car with $100 worth of cash.
I’ve done this a couple of times already. This time I’m going to give you a better idea of how accurate it is. We’re making it work for us.
So the goal is to figure out how much cash are we actually making on our current assets and our current debt. Let’s say we have a car with $100 in the bank.If we are adding another $100 in to that, and we have a $100 in debt. This means we are now with a $200 cash.We know that we can pay off that debt with $200.In order to get that cash back, we must add another $200.
That works out to be 300.The question is, how much do we actually have in cash?Well, the answer is the same. The cash we have is now worth 300. If we add in to that 100 in debt, we now have 400. So that 400 plus 200 gives us a cash value of 600. Now, we may be able to pay off a little of that debt with cash, but we still have a ton of cash. This is where it gets tricky.
What happens when we find ourselves with 400 cash? Well, if we add the 400 to the cash of 600, we get a cash value of 800. Now, you might think that 400 plus 800 is 400, but that’s actually not true. We add 400 to the cash we had before, but we really didn’t have this total cash until now, so that 400 gets added to our cash.
This all sounds good, but let me be clear. We may have 400 bucks, but the present value of that cash is only 500. This means we are now paying 800 dollars to anyone who wants to buy us. But if we had an emergency we would have already paid them 800, because this is a cash crisis situation. And unfortunately, that’s just the beginning of a much more severe problem.
The problem is that even if we were to eliminate the cashflow, we would still have lost the market price that we paid for the current cash, and if we were to remove all the cash from the market, that means we would have to pay for another 400 bucks to buy more people, but we would still have lost the market price that we paid for the current cash, and if we were to buy more people, the present value of the money would be only 820 dollars.
The problem is that now we have lost all of our money, and we still have to pay for the money we lost. This is a situation where we can either pay for more, or we can pay for less but still lose money.
At the end of the day, we can’t just just pay for the money we lost. There’s a lot to take in and take away from us, and if you were to pay for the money we lost for a second time, then you’d have lost the money.