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Explain why it is necessary to discount a future income stream to determine it's present value?
To answer this question, ask yourself this question: would you rather have $100 today or $100 one year from today? How about $100 today or $105 one year from today? $100 today or $200 one year from today? If you ask questions like that to a group of people, you can estimate the average discount rate fairly effectively.
In the case of the individual, waiting for income delays the utility provided by the consumption of goods or services that income can provide, and most people would rather have consumption sooner, so they can derive utility for longer amounts of time.
In the case of the firm, there is a time value to money. At the very least, money can be invested in government T-bills, guaranteeing a rate of return. If two investments have the same guaranteed return, but one will have a return five years before the other, a firm would, ceteris paribus, prefer the faster-repaying investment, because they could invest the money in a T-bill for five years and be better off. (Or, more likely, make additional investments.)
What else can I help you with?
How can one determine the present value of a bond?
To determine the present value of a bond, you need to calculate the present value of its future cash flows, which include periodic interest payments and the bond's face value at maturity. This involves discounting these cash flows back to the present using an appropriate discount rate, typically the bond's yield to maturity. The sum of these discounted cash flows gives you the present value of the bond.
Does decreasing a discount rate lower the present value?
No, decreasing the discount rate actually increases the present value of future cash flows. The discount rate reflects the time value of money, and when it is lowered, future cash flows are discounted less heavily, resulting in a higher present value. Conversely, increasing the discount rate would decrease the present value.
How does discount rate affect net present value?
The discount rate directly influences the net present value (NPV) by determining the present value of future cash flows. A higher discount rate reduces the present value of those cash flows, leading to a lower NPV, while a lower discount rate increases the present value and thus the NPV. If the discount rate exceeds the internal rate of return of a project, the NPV may become negative, indicating that the project may not be viable. Conversely, a lower discount rate can make an investment more attractive by increasing its NPV.
As the discount rate becomes higher the present value of inflows approaches?
As the discount rate increases, the present value of future cash inflows decreases. This is because higher discount rates reduce the value of future cash flows, reflecting the opportunity cost of capital and the time value of money. Ultimately, with a sufficiently high discount rate, the present value of future inflows can approach zero, indicating that those future cash inflows are less valuable in today's terms.
How to calculate the present value of a bond?
To calculate the present value of a bond, you need to discount the future cash flows of the bond back to the present using the bond's yield to maturity. This involves determining the future cash flows of the bond (coupon payments and principal repayment) and discounting them using the appropriate discount rate. The present value of the bond is the sum of the present values of all the future cash flows.
What is the present of explain?
Explain is present tense. I/We/You/They explain He/She/It explains The present participle is explaining.
What is the present tense of explain?
Explain is present tense. I/We/You/They explain He/She/It explains The present participle is explaining.
Is the word explain present tense?
No, the word "explain" is not present tense. "Explain" is the base form of the verb, and it can be used in various tenses like present ("I explain"), past ("I explained"), or future ("I will explain").
As the discount rate becomes higher and higher the present value of inflows approaches what?
As, the present value of future cash flows is determined by the discount rate, so increase or decrease in the discount rate will affect the present value. Discount rate is simply cost or the expense to the company,so in simplest terms, discount rate goes up, cost goes up,so this will lower the present value of cash flows. Assumes a discount rate of 5%,to discount $100 in one years time: Present Value=$100 * 1/(1.05) =$95.24 Ok,as you say,if the discount rate becomes higher,let's say 8%: Present Value=$100 * 1/(1.08) =$92.6 so, the higher the discount rate, the lower the present value.
How do you calculate present value of multiple cash flows?
To calculate the present value of multiple cash flows, you need to discount each cash flow back to the present using a specific discount rate. The formula is: ( PV = \sum \frac{CF_t}{(1 + r)^t} ), where ( CF_t ) is the cash flow at time ( t ), ( r ) is the discount rate, and ( t ) is the time period. You sum the present values of all individual cash flows to get the total present value. This approach helps determine the current worth of future cash flows.
What is normally used as the discount rate in the net present value method?
the net present value as determined by normal discount rate is 10%
How can I determine if my cat is microchipped?
To determine if your cat is microchipped, you can take them to a veterinarian or animal shelter to have them scanned with a microchip reader. This will quickly detect if a microchip is present and provide you with the necessary information.
How can one determine the present value of a bond?
To determine the present value of a bond, you need to calculate the present value of its future cash flows, which include periodic interest payments and the bond's face value at maturity. This involves discounting these cash flows back to the present using an appropriate discount rate, typically the bond's yield to maturity. The sum of these discounted cash flows gives you the present value of the bond.
To increase a given present value the discount rate should be adjusted?
To increase a given present value, you would generally lower the discount rate. This is because a lower discount rate reduces the impact of future cash flows, making the present value higher. Conversely, increasing the discount rate would decrease the present value.
How does discount rate affect net present value?
The discount rate directly influences the net present value (NPV) by determining the present value of future cash flows. A higher discount rate reduces the present value of those cash flows, leading to a lower NPV, while a lower discount rate increases the present value and thus the NPV. If the discount rate exceeds the internal rate of return of a project, the NPV may become negative, indicating that the project may not be viable. Conversely, a lower discount rate can make an investment more attractive by increasing its NPV.
What is the present tense of determined?
I/you/we/they determine. He/she/it determines. The present participle is determining.
What is the present value of 500 to be received 10 yrs from today if it is discount at the rate of 6 percent?
What is the present value of 500 to be recieved 10 yrs from today if it is discount at the rate of 6 percent?
