9780321818171_berk_ch03

Indeed if we convert from dollars today to dollars in

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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) $2000 in one year we see that the two results are equivalent, but expressed as values at different points in time. 1 discount factor 1 1 1 r 2 is the rate of exchange between dollars in the future and dollars today. It has the units of “$ 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 Comparing Revenues at Different Points in Time Discount Factors and Rates. In the preceding calculation, we can interpret 1 1 5 5 0.93458 11r 1.07 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.

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