Choosing the Discount Rate (k)

Choosing the Discount Rate (k) - Choosing the Discount Rate...

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Choosing the Discount Rate ( k ) 1 Throughout the course, we will refer to k as: The annual interest rate The discount rate The opportunity cost of funds or capital The required rate of return The investment opportunity rate The annual cost of capital
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Choosing the Discount Rate (k) 2 k is the rate of return the firm should earn on its assets It is the Opportunity Cost ; tying up funds in one or more assets (like current assets) prevents the firm from using those resources in the most valuable alternative, which is usually reinvestment in the firm.
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Simple vs. Compound Interest 3 Before we move on, let’s compare simple and compound interest to ensure you agree the difference is not material intra- year… Using the example from before…. Let’s assume a firm has standard 30-day credit terms, has average daily sales of
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The Difference is Negligible 4 k = annual rate i = daily periodic rate n = number of days FV FV 1 + ( kn ) [1 + k ] n FV
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This note was uploaded on 01/24/2012 for the course FIN 4260 taught by Professor Victorwakeling during the Spring '12 term at Kennesaw.

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Choosing the Discount Rate (k) - Choosing the Discount Rate...

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