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Unformatted text preview: rs in one year) or the present value amount (dollars today): we should
reject the investment. Indeed, if we convert from dollars today to dollars in one year,
( $1869.16 today) (1.07 $ in one year/$ today) $2000 in one year we see that the two results are equivalent, but expressed as values at different points in time.
discount factor 1 1 1 r 2
is the rate of exchange
between dollars in the
future and dollars today. It
has the units of “$ today/$
in one year.” discount rate The
appropriate rate to
discount a stream of cash
flows to determine their
value at an earlier time. E X AMPLE 3 .4
at Different Points
in Time Discount Factors and Rates. In the preceding calculation, we can interpret
as the price today of $1 in one year. In other words, for just under 93.5 cents, you
can “buy” $1 to be delivered in one year. Note that the value is less than $1—money
in the future is worth less today, and so its price reflects a discount. Because it pro1
vides the discount at w...
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This note was uploaded on 02/07/2014 for the course MIS 304 taught by Professor Mejias during the Spring '07 term at University of Arizona- Tucson.
- Spring '07