What is the difference between Present Value and Break-even Price?
Why aren’t they always the same? The Present Value of Servicing is defined as “the sum of the after-tax monthly cash flows discounted at the After-tax Discount rate given the input purchase price (or NO purchase price) stipulated (which may have been higher or lower than actual present value).” From a mathematical point of view, it is relatively straightforward to calculate the present value. You need to calculate the After Tax Cash Flow and then discount this at the stated After Tax Discount Rate. As you increase or decrease the Purchase Price, the Present Value will change. The Break-even Price is the Purchase Price (net of Conversion Costs) that will generate an Internal Rate of Return equal to the After Tax Discount Rate. The return you REQUIRE will be equal to the return GENERATED by that portfolio, given stated company and portfolio characteristics. Computing the Break-even Price is an iterative, or repetitive calculation, much like calculating Internal Rate of Return. IRR can al
