discounting

Examples of discounting in the following topics:

• NPV Profiles

  • The NPV Profile graphs the relationship between NPV and discount rates.
  • The NPV calculation involves discounting all cash flows to the present based on an assumed discount rate.
  • When the discount rate is large, there are larger differences between PV and FV (present and future value) for each cash flow than when the discount rate is small.
  • The independent variable is the discount rate and the dependent is the NPV.
  • It is the discount rate at which the NPV is equal to zero.

• Discounted Cash Flow Approach

  • Using this equation, we find the discounted present value of the asset to be $3,612.27.
  • This finds discounted present values (DPV).
  • This interest rate is commonly referred to as the "discount rate" when discounting values from the future to the present.
  • Divide this value by the discount rate minus the assumed growth rate.
  • Calculate the value of a project using the discounted cash flow approach

• Discounted Payback

  • Discounted payback period is the amount of time to cover the cost, by adding positive discounted cash flow coming from the profits of the project.
  • Assuming the discount rate is 10%, we would apply the following formula to each cash flow.
  • Discounted Cash Flow at 10%: Year 0: -2000, year 1: 909, year 2: 827, year 3: 1503.
  • The next step is to compute the cumulative discounted cash flow, by summing the discounted cash flow for each year.
  • Bundesbank discount interest rates from 1948 to 1998.

• The Discount Rate

  • Discounting is the procedure of finding what a future sum of money is worth today.
  • Another common name for finding present value (PV) is discounting.
  • Discounting is the procedure of finding what a future sum of money is worth today.
  • The interest rate, in this context, is more commonly called the discount rate.
  • The discount rate represents some cost (or group of costs) to the investor or creditor.

• Present Value of Payments

  • The value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • Therefore, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • In practice, this discount rate is often determined by reference to similar instruments, provided that such instruments exist.
  • The formula for calculating a bond's price uses the basic present value (PV) formula for a given discount rate .
  • The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments being made at various moments in the future.

• Setting a Credit Policy

  • If a discount is offered, the amount of the discount must also be determined.
  • There are many purposes for discounting, such as to move out-of-date stock, to reward valuable customers, as a sales promotion, or to reward behaviors that benefit the discount issuer.
  • Some common types of discounts include:
  • Seasonal discount (for orders placed in a slack period for example).
  • Trade discount (usually given when the buyer agrees to perform some function).

• Calculating the NPV

  • The other integral input variable for calculating NPV is the discount rate.
  • There are many methods for calculating the appropriate discount rate.
  • Since many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors, they may choose to use a variable discount rate.
  • Reinvestment rate can be defined as the rate of return for the firm's investments on average, which can also be used as the discount rate.
  • The payments are discounted using a selected interest rate, signified by the i variable.

• Discount Policy

  • Fed's second monetary policy tool is the discount policy.
  • For example, the Fed raises the discount rate.
  • Banks can abuse the discount window.
  • For example, the Fed raises the discount rate.
  • Discount policy is not a good tool to control the money supply.

• Discounted Dividend vs. Corporate Valuation

  • The dividend discount model values a firm at the discounted sum of all of its future dividends, and does not factor in income or assets.
  • The dividend discount model (DDM) is a way of valuing a company based on the theory that a stock is worth the discounted sum of all of its future dividend payments.
  • b) If the stock does not currently pay a dividend, like many growth stocks, more general versions of the discounted dividend model must be used to value the stock.

• Recording Purchases

  • For an example of a purchase discount, a purchaser who buys a 100 dollar item with a purchase discount term 3/10, net 30 only needs to pay 97 dollars as long as he or she pays within 10 days.
  • Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances.
  • A purchase discount is an offer, from the supplier to the purchaser, to reduce the selling price if payment is made within a certain period of time.
  • Under the net method, purchase discounts are realized right away.
  • And if the payments are not made in time, an anti-revenue account named Purchase Discounts Lost is debited to record the loss.