Present Values, Discounting, and Capital Budgeting

Need help with your homework? Look no further! Our subject experts are ready to effortlessly handle your assignments, so you can finally say goodbye to stress and hello to top grades.

Please enable JavaScript in your browser to complete this form.
Click or drag files to this area to upload. You can upload up to 3 files.
Get a response in under 15 min

Let us now turn into the other portion of such a problem of a future value. If you are to know the entire money you are to have by the coming year, this will be that of the value hold for today? The value will be very important in the context of corporate where will the regular question will be “if a project X is to return the value of $1 million at a time period of 5 years, then how much must you will pay to take under the project at the present time?” the process of capital budgeting, is the process that will tend as the answer to this question. It is the important decision making that must be followed. (the term originated from the very idea that business brands mostly have a certain “capital budget” which allocates into the projects in that budget.)

Here is the rates of returns formula,

Present Values, Discounting, and Capital Budgeting 29

All that you need to get the answer from this formula is to give an answer for the following questions:

  • If the remaining interest rates of the existing economy isr1, what will be the project’s worth today, given that the future value will be C1?

For example, if you are thus looking for a present value, the amount of the future value, what will that be at this rates of return? Let us, take an example, supposedly if the given interest rate is that of 10%, then what amount must you save to receive a sum of $100 the coming year? If the project is worth $100 the next coming year, what will the project valued of on the current market? The answer will be left upon the decision making as to who will be translating the money, i.e., the present money. So, you will have to simply supply with a rearranged rate of returns formula.

Present Values, Discounting, and Capital Budgeting 30

Check this out – investment that you make is that of $90.91 with the interest rates that are of 10% and will return in the upcoming period:

Present Values, Discounting, and Capital Budgeting 31

The entire present value formula that uses discounting is known as division operation. ‘Discounting’ is the term which indicates a reason that we must be on the right path in reducing the value and are doing it when the future cash is being translated into a current cash value. In case if you want to, then all can wonder about ‘discounting’ as a conversion that is of all the future cash flowing amount to the present current value of sum which is equivalent. Hence the term discounting will be accounted for as reverse accounting.

Therefore the current present value for all the upcoming year is $90.91 this is the value of today’s future in cash flows. If the value is that of the project will cost, and if you borrow an amount at interest rates- 10% from somewhere else, then there will be no difference in receiving $100 the coming year, and the receiving of $90.91 presently. In contrast to this situation, if the rate is standardized in an economy as 12% for your project and that it will be a great deal to grasp. The present value of the project will be,

Present Values, Discounting, and Capital Budgeting 32 This will be lesser valuable than the previous value $90.91. If the rate of return was 8%, this project will be a stupendous one. At the current present value, the future value will pay off,

Present Values, Discounting, and Capital Budgeting 33 This should exceed the cost will be that of $90.91. The existing present value for the remaining project will weigh off against the cost and will determine the course as to whether you must take any project at today or not. The present occurring value will be “the number of prevailing interest rates that you wanted, how much of it will be saved by the next year?

Let us do the exact same calculation, but this time with the time extension. In case the interests rate was 10% for a period, then what would be the value that is of $100 in the duration of 2 periods? The main value of this is,

Present Values, Discounting, and Capital Budgeting 34

In the periods, you can earn such rate of returns for (1 + 10%) * (1 + 10%) − 1 = 1.12 − 1 = 21% from somewhere else. Thus, this is an appropriate comparison rate of returns.

These rate of returns, which is used to finance the project, is the discount rate or cost of capital. Thus, this will be a rate of returns that is used to raise the money. In a hypothetical market, the opportunity cost is also moreover cost of capital. Remember, that you need to invest money, at such a rate that it will be an investment elsewhere. Better alternative investment routes will give rise to higher cost of capitals and low value of specific investment projects. Any investment that will promise to give $1000 on the coming year is less worthy if you are earning the 50% instead of 5% which is in some other place. A nice rule that you can develop to your advantage is that of “opportunity” in front of “cost of capitals” – that will give, opportunity cost of capital. This book, we will discuss about what economy popular rate is. And the 10% that is needed for investing or borrowing in future investments.  In the upcoming chapter, you will also learn how the rate of return is hence determined.

Present Values, Discounting, and Capital Budgeting 35 When you are multiplying the future true cash flow with the right discount factor, one get the end product of the present value. Thus looking at the formula 2.2, pupil will see that the discount factor is quantity.

Present Values, Discounting, and Capital Budgeting 36 Thus, this states that, discount factor changes $1 in this future to an equivalent cost of dollars that it is of today. Taking this as an example, 2-year with 21% of rate of return and this dollar in two years will be worth 83 cents at the present date. (Many times people calls this discount rate which is incorrect and is used as r1)

The figures 2.2, below, will show the only discount factor which will decline the costs of capital is 20% for a year. After a decade passes, the dollar in the project might earn lesser than twenty cents as of today. You can compare the figures 2.1 and 2.2 and notice that both are ‘flip side’ to each other.

Present Values, Discounting, and Capital Budgeting 37

Present Values, Discounting, and Capital Budgeting 38 Always remember that the bonds that are different form the savings accounts. Then this will be first one is lowered by the promise of fixed off future payments. However, the later one is paid when the interest rates are daily. This makes up for a very little form of important relationship among the many value of such bonds and these remaining interest rates as they will move in totally opposite directions.

If for example, the bond that you made a promise to pay for $1000 in duration of 1 year, then the interest rate will be that of 5%. Thus the bond will have a present value of $1,000/1.05 ≈ $952.38. If these remaining interest rate increases all of a sudden to 6%, then it will become the new of opportunity well cost of capital. This present value will become $1,000/1.06 ≈ $943.40. You will certainly lose $8.98. This is further about that 0.9% of the official authentic $952.38 of investment. All the value that you have saved as your full fixed-bond deposit payment that has been in the upcoming future will go down as all the investors can do much better than 5% that too by purchasing new bonds. These will have a better opportunity to make up for the lost economy. These bonds can further earn a specific rate of return which is 6% rather than 5%. Thus if you are planning of selling your bonds right now, then you will get to selling it at a discounted rate and leave the buyer with a close rate of such return of 6%. In case you delay the investment, then there will be a sudden change of 6% and will have nothing to do with the investment. Looking at the other hand side, the interest rate if drops suddenly, then rate will drop to 4%. The bond will rise in value. Trying to make a gain of $9.16, the investors will willingly pay off $1,000/1.04 ≈ $961.54. The relationship that you will get a prevailing interest rate and many bond prices which are simply general and nothing else.

Present Values, Discounting, and Capital Budgeting 39

Links of Previous Main Topic:-

Links of Next Financial Accounting Topics:-

Homework Blues?

Get expert help with homework for all subjects.

  • NPlagiarism-free work
  • NHonest Pricing
  • NMoney-back guarantee

Latest Reviews

Solved Sample Works

Accounting Homework

Corporate Accounting Sample

Biology Homework

Genetics Assignment Sample

Essay Writing Help

Business Plan Sample

Homework Help FAQs

Our Answers to Your Questions

How do I submit my homework?

Getting homework help is very simple with us. Students can either send us the homework via email or they can upload it to our online form here. For a quicker response, You can also chat with us at WhatsApp and submit homework directly. You are sure to get a response from our side within 10 minutes.

How much will my homework cost?

The cost of paying someone to do your homework varies depending on the service and the type of assignment. We have listed our standard pricing plans for popularly used writing services. For other kind of assignments, You can get a free instant quote from us using our online form.

We also accept partial payment to start working on your assignment help. You can pay the remaining amount when your task gets completed. No pressure of up-front payment. No hidden order costs.

Can I receive help with my homework anytime?

Yes, you can receive help with your homework anytime with us. Our online homework help services are available 24/7, allowing you to receive assistance with your homework anytime, anywhere.

For urgent homework requests, reach out to us through our LiveChat or WhatsApp channels and one of our friendly support agents will assist you in finding the right expert for your online homework help request immediately. With our services, you can rely on 24/7 availability and meeting deadlines.

Are online homework websites budget-friendly for students like me?

Yes, Our Online Homework Help websites are an affordable solution for you as a student. Compared to traditional tutoring services, MyHomeworkHelp prices their homework help services honestly and within the budget of college students. This makes it easier for you to receive assistance with your homework without breaking the bank.

What is your plagiarism-free policy?

At myhomeworkhelp, we take plagiarism very seriously and ensure that all solutions provided by our tutors are original and authentic. Our tutors are trained to provide custom-made solutions, tailored specifically to meet the requirements of each student. We do not provide pre-written papers. All our homeswork solutions are made from scratch, guaranteeing 100% orignal homework answers.

Additionally, we have strict plagiarism-detection tools in place to check all submissions for authenticity.

Is using an Online Homework Help Service cheating?

Using online homework help services is not equivalent to cheating. Our services are intended to support students with their homework and provide them with the resources they need to succeed academically. With the help of our online homework help services, students can receive immediate assistance with their homework from any location, at any time.

At myhomeworkhelp, we are committed to promoting academic integrity. Our tutors provide solutions that serve as guides for drafting your own work. It is not acceptable to submit someone else's work as your own, as this constitutes academic plagiarism.

Can I chat with my tutor?

Using our secure chat board, you can now chat directly with your assigned tutor. The chats are encrypted both ways to secure your privacy. This makes your contact with the tutor directly & confidentially, so you can better explain any requirements or changes if needed or just need updates.

You can't contact the experts outside of chat board platform. Sharing any personal information, including but not limited to contact information, goes against our Terms and Conditions and therefore may result in permanently blocking you from the platform. We take any personal data very seriously and we do it for the safety of our users.

Know more about chat board here.

What is your money-back guarantee policy?

It’s worth noting that our online homework help service rarely leads to disappointment among students. Our expert tutors, along with our support and quality assurance team, are dedicated to providing the best possible experience for our customers. However, if for any reason a student is unsatisfied with their homework help solution, we offer unlimited revisions until they are fully satisfied.

In the rare event that a student remains unsatisfied even after revisions, we offer a money-back guarantee. We want all of our students to feel confident and secure when they turn to us for assistance with their homework, and this guarantee is just one way that we demonstrate our commitment to providing the best possible service. If you have any concerns about our services or the quality of the work you receive, please contact us for support.

What is the expertise of the tutor assigned to do my homework?

At myhomeworkhelp, we take pride in our team of qualified and experienced tutors. All of our tutors undergo a rigorous selection process and are required to have a minimum of a master's degree in their respective fields. Additionally, they must pass a series of tests to demonstrate their proficiency and ability to deliver quality work. We believe in transparency and providing our clients with the best possible service. You can be confident in the expertise of the tutor assigned to do your homework.

What about privacy & confidentiality?

Using My Homework Help is absolutely safe. We care about your security, therefore we encrypt all personal data to make every user feel safe while using our services and we don’t share any personal information with any third parties without your permission. Your credit card information is not stored anywhere at My Homework Help, and use of PayPal relies on their secure payment networks. Your identity, payment and homework are in safe hands. You can always be certain of getting professional help and remaining anonymous, while using My Homework Help.