Discounting
- Created by: tanja soulsby
- Created on: 31-05-17 10:26
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- Discounting
- Process of adjusting the value of money received in the future to its present value
- Done so investors can compare like with like when they look at cash inflows they will receive from projects
- Can be see as the opposite of calculating interest
- Done by multiplying the amount of money by a discount factor
- Discount factor is like the opposite of a bank interest rate
- Discount factors always less than 1 because the value of money in the future is alwats less than its value now
- Discount factors depend on what the interest rate is predicted to be
- High interest rates mean future payments have to be discounted to give correct present values
- Means that present value represents the opportunity cost of not investing the money in the bank where it could earn a good interest rate
- High interest rates mean future payments have to be discounted to give correct present values
- When interest rates are predicted to be low, the future cash inflow doesn't need to be discounted so much
- Less opportunity cost
- To find the discount factor use formula (1/1 + r)n
- r = interest rate as a decimal n = year
- Process of adjusting the value of money received in the future to its present value
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