Discount

Question regarding present value with discount rate

Question regarding present value with discount rate
  1. How does present value relate to discount rate?
  2. How are present values affected by changes in discount rates?
  3. Does present value increase with discount rate?
  4. What is an appropriate discount rate for present value?
  5. Why does NPV decrease as discount rate increases?
  6. What happens when discount rate increases?
  7. How does inflation affect discount rate?
  8. Why are discount factors always less than 1?
  9. Who makes decisions regarding changes in the discount rate?
  10. What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?
  11. Why do firms use high discount rates?
  12. Why do discount rates vary?
  13. How do interest rates affect discount rate?
  14. What determines the discount rate?
  15. What is the difference between discount rate and interest rate?

How does present value relate to discount rate?

Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows.

How are present values affected by changes in discount rates?

Effect of Discount Rate on Present Value

The discount rate or interest rate can affect the present value of future cash flows. If the discount rate is lower (representing a lower risk and a lower required return), the present value is higher, and vice versa.

Does present value increase with discount rate?

Relationship Between Discount Rate and Present Value

Higher discount rates result in lower present values. This is because the higher discount rate indicates that money will grow more rapidly over time due to the highest rate of earning.

What is an appropriate discount rate for present value?

In the blog post, we suggest using discount values of around 10% for public SaaS companies, and around 15-20% for earlier stage startups, leaning towards a higher value, the more risk there is to the startup being able to execute on it's plan going forward.

Why does NPV decrease as discount rate increases?

NPV is the sum of periodic net cash flows. Each period's net cash flow -- inflow minus outflow -- is divided by a factor equal to one plus the discount rate raised by an exponent. NPV is thus inversely proportional to the discount factor – a higher discount factor results in a lower NPV, and vice versa.

What happens when discount rate increases?

The discount rate is used to influence banks to lend more or less to businesses and consumers. A higher discount rate means it's more expensive for banks to borrow funds, so they have less cash to lend.

How does inflation affect discount rate?

It means a higher inflation rate means a lower interest rate and vice versa. Using a higher discount rate means a lower present value of a cash flow. It means when future cash flows are discounted with a higher discount rate, the net present value of the future cash flows decreases.

Why are discount factors always less than 1?

Any discount factor equation uses the assumption that today's money will be worth less in the future due to factors like inflation, which gives the discount factor a value between zero and one.

Who makes decisions regarding changes in the discount rate?

The individual boards of directors of each of the twelve Federal Reserve Banks vote on discount rate recommendations. Requests from individual Reserve Banks to change the discount rate go to the Board of Governors of the Federal Reserve System, located in Washington, D.C., for approval.

What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows? D) The PV will remain the same as the timing of the cash flows must change also.

Why do firms use high discount rates?

Consistent with this explanation, firms that use high discount rates have strong balance sheets, low leverage, and large cash holdings. In addition, firms appear to increase discount rates to account for idiosyncratic risk.

Why do discount rates vary?

If discount rates are high when their marginal utility of wealth is high (bad times), rational investors prefer assets whose returns co-vary positively with discount rate shocks. In equilibrium, they bid up the prices of such assets, leading to low expected returns and a negative price of discount rate risk.

How do interest rates affect discount rate?

Setting a high discount rate tends to have the effect of raising other interest rates in the economy since it represents the cost of borrowing money for most major commercial banks and other depository institutions. This could be considered a contractionary monetary policy.

What determines the discount rate?

An appropriate discount rate can only be determined after the firm has approximated the project's free cash flow. Once the firm has arrived at a free cash flow figure, this can be discounted to determine the net present value (NPV).

What is the difference between discount rate and interest rate?

The term “interest rate” is used when referring to a present value of money and its future growth. The term “discount rate” is used when looking at an amount of money to be received in the future and calculating its present value. The word “discount” means “to deduct an amount.”

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