xid-7626144_2

# xid-7626144_2 - A note on discounting Discounting, like its...

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A note on discounting… Discounting, like its cousin, compounding, is a mathematical procedure for expressing the value today of a sum, amount , or benefit to be received in the future (or, in the case of compounding, the value in the future of a sum we already have received). Discounting does not refer to the action of deducting from a given amount. That may represent a 'discount' at the mall , but it has only a superficial resemblance to the concept and mathematics of discounting, which is what we are interested in here. Here's the formal mathematical expression of discounting: where NPV = net present value, ∑= summation from period 0 to period n (in the example problem n goes from period 1 to period 5) B = benefits of the project in year n. Suppose we have a problem where the value of net benefits received each year is \$1,000,000, and the interest rate is 5%. You may be tempted to deduct \$50,000 (5% of \$1 million) for the first year, = \$950,000 (and so forth for the remaining years). That's not discounting. To discount correctly, you must use the formulation shown

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## This note was uploaded on 04/05/2012 for the course ECP 3302 taught by Professor Staff during the Fall '11 term at Florida State College.

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xid-7626144_2 - A note on discounting Discounting, like its...

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