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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%
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.
Why a high discount rate gives a low present value of a cash flow?
The higher the discount rate, the more time value of money we are tacking out of original amount from the future value
What is the meaning of present value?
Present Value means the current value of future cash flows discounted at the appropriate discount rate. Say I gave you a document promising to give the bearer $100,000 on a particular date. If the date was tomorrow, you could sell the document today for close to $100,000. If the date was 100 years from now, the document is close to worthless. On the settlement date, it's worth $100,000. The "present value" is the value right now of a promise to pay in the future. Usually you calculate the present value based on the period of time and an interest rate, also known as the discount rate.
Present value is so important for corporate finance?
$500 if interest for five years at a 7% interest rate
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%
What is the formula for Present Value Interest Factor?
Present Value Interest Factor, abbreviated as PVIF and is used to simplify present value computations, may be computed as follows: PVIF = 1 / ( ( 1 + r) ^ t) where... r = interest discount rate t = number of periods
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.
What is the difference between compounding and discounting?
Compounding finds the future value of a present value using a compound interest rate. Discounting finds the present value of some future value, using a discount rate. They are inverse relationships. This is perhaps best illustrated by demonstrating that a present value of some future sum is the amount which, if compounded using the same interest rate and time period, results in a future value of the very same amount.
The present value of future cash flows has what relationship to interest rate?
The present value of future cash flows is inversely related to the interest rate.
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?
When a bonds stated interest rate is less than the market interest rate is the rate at a discount or premium?
When the coupon rate (the contractual periodical "interest" payments) are lower than the yield (the market required return) the bond will be in discount. This discount makes up for the low value of the coupons.
What is the inerest rate if the government perpetuity pays 4 a year and is selling for 48?
The interest rate is 8 1/3 because Present Value = Payment/Interest rate Present Value = 48 Payment is 4 Interest Rate = Payment/Present Value = 4/48 = 8.33%
If the interest rate is 4 percent what is the present value of this stream of payments?
Present value of streams can be found by dividing the streams with 4 percent interest rate for example if stream is 100 then present value will be present value = 100 / .04
What is the relationship between interest rate and discount rate?
When interest rates increases currency value appreciates while when interest rate decreases so the currency rates depreciates
Why a high discount rate gives a low present value of a cash flow?
The higher the discount rate, the more time value of money we are tacking out of original amount from the future value
What is the relationship between interest rate with present value and future value?
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