Question

Remember that the discount rate is the interest rate that we use to find the present value of a cash flow or a lump sum. If you have $10,000 in 10 years, what would be the value of that $10,000 today. We would need to calculate the present value using 10 years as the number of periods (n), a discount rate (r) that we would need to determine, and we know the future value (fv) is $10,000. What if we are to receive $100 per month over the next 5 years. We would need to find an appropriate rate to use to discount the value of the cash flow ($100 per month for 5 years) to determine the value of that cash flow in today's dollars.

This is a good topic. It's important because it helps us determine if we should move forward with a project or an expansion. It can be used to help us determine if we should buy a business or help us determine the asking price of our business if we decide to sell our business. It's wonderful to know that our business brings us $100,000 per year in net profits, but how do we use this piece of information to determine the value of our business? Perhaps we would discount $100,000 each year for 5 years using a discount rate that we would need to determine as appropriate and start there as an offer price to any interested buyer? Determining the interest rate (the discount rate) is the trick. I am looking forward to a healthy discussion surrounding this topic.

Answer #1

yes, we have to discount each and every cash flow.

Let's take example of $100 per month for next 5 years(60
months)

Let discount rate = R% per annum and r=R/100

now discount rate per month = r/12

now for monthly compounding, present value =

It is sum of a geometric progression series and can be easily
calculated as

similarly, for $100,000 per year for next 5 years,

Present value=

Please do rate me and mention doubts, if any, in the comments section.

In Module 1, we introduced the concept of discount rates – the
idea that value in the future is not worth as much as value today.
We’re going to ignore those right now for simplicity, and assume
that the discount rate is zero. Ignoring discount rates means we
can just multiply the probabilities and payoffs to determine the
expected value of the investment:
($1,000,000 * 20%) + ($0 * 80%) = $200,000
This is the present value of the uncertain...

Find the present value of the following cash flow stream if the
discount rate is 6.97%: CF1 = 24, CF2 = 42, CF3 = 47, CF4 = 74. The
cash flows are received at the end of each year. Round to the
nearest $0.01 (e.g., if your answer is $175.386, record it as
175.39).

1a. What is the present value of the following set of cash flows
if the discount rate is 13.9%? (the cash flows occur at the end of
each period) (round answer to nearest penny and enter in the
following format 12345.67)
Year 0 cash flow = -1400 (a negative cash flow)
Year 1 cash flow = 400
Year 2 cash flow = 2400
Year 3 cash flow = 1100
Year 4 cash flow = 2400
Answer:
1b. A credit card...

. Calculate the IRR and NPV for the following cash flows. Assume
a 15% discount rate
Year
Project 1
Cash flow
Project 2
Cash flow
0
-$20,000
-$20,000
1
1,000
12,000
2
3,000
15,000
3
4,000
3,000
4
12,000
4,000
5
15,000
1,000
9. If your tenant pays you rent of $24,000 a year for 10 years,
what is the present value of the series of payments discounted at
10% annually?
10. You are going to invest $300,000 in a...

(T/F) The higher the discount rate or interest rate the lower
my PV (Present Value)
(T/F) The further out I receive a FV, the higher the PV
(T/F) The more time I have to invest the lower my FV (future
value)
(T/F) The higher the interest rate the higher the FV
(T/F) The more money I invest the higher FV
What is the FV of $50,000 invested today in 9 years if I can
earn 5%?
What is the FV...

The two projects are as follows. Discount rate = 10%.
Project
X Project Y
Year Cash-Flow
Cash-Flow
0
-$100,000 -$100,000
1
50,000 10,000
2
40,000 30,000
3 30,000 40,000
4.
10,000
60,000
Calculate the payback period of project X
1.33 years
2.33 years
3.33 years
4.33 years
Calculate the crossover rate.
6.93%
6.58%
10.00%
7.17%
Imagine that discount is 5%, and the two projects are mutually
exclusive, which project shall you choose?...

1. Calculate the present value of each of the alternatives
below, if the discount rate is 12%.
a. $45,000 today in one lump sum.
b. $70,000 paid to you in seven equal payments of $10,000 each
at the end of each of the next seven years.
c. $80,000 paid in one lump sum 7 years from now.
2. You are negotiating for the terms of a legal settlement, and
your opponent’s attorney has presented you with the following
alternative settlement...

Assuming a discount rate of 6 percent, which of the following
has the highest cash value (present value at the date of purchase)?
Assume all purchase options below are as at the same date. There
will be a single cash flow for all of the alternatives (balloon
payments at the end of the financing period).
a.
$60,000 today
b.
$120,000 in 8 years
c.
$90,000 in 3 years
d.
$100,000 in 5 years

Solve using math formulas and show explanation. If the
appropriate discount rate for the following cash flows is 9.75% per
year, what is the present value of the cash flows? What is the
value of all the cash flows at year 2?
Year
Cash Flow
1
$2,800
2
0
3
8,100
4
1,940

what does present value really tell us ? if the discount rate is
higher why would the pv be lower ?

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