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Line 3: − − Let's consider a simple example. Suppose, ignoring Shakespeare's advice I lent $100.00 each to two friends of mine, due one year from today. − − One friend calls up and asks me how much will I accept from him if he pays today. Because I am getting currenlty getting 5.27% on my invesments, and this fiend is almost risk free (he is conservative) I tell him I will accept $95.00. This $95.00 is the Net Present Value of the $100.00 owed to me. The discount rate I used was my IRR. − − My other friend, a Wikipedia editing liberal also owes me $100.00 one year from now. Fearing he will contribute all his money to left wing candidates in the upcoming election, I call him and tell him I will clear of his debt if he gives me $90.00 today. My discount rate, now 10%, includes the original IRR but also an additional factor for risk. − − Note then, that while the lender (me) and the product (money loan) remained the same, the discount factor, hence present value, can and will change.
Net Present Value (view source)
Revision as of 19:46, September 10, 2007
, 19:46, September 10, 2007Parody removed
The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.
The discount rate may have many components; Internal Rate of Return (IRR), Cost of Capital, Cost of Debt, Risk, and so on.
[[Category:finance]]
[[Category:finance]]