Among other places, it's used in the theory of stock valuation.
At the end of the first contested divorce forms ontario year we would be expecting to receive the payment of 10,000 in two years.If you received 10,000 in a year, the present value of the amount would not be 10,000 because you do not have it in your hand now, in the present.I wouldnt be surprised if he was thinking that interest rates would rise again.A more simple example of the net present value of incoming cash flow over a set period of time, would be winning a Powerball lottery of 500 million.Final Thoughts As an individual investor, Im not being pressured by peers and other analysts to conform to their models and inputs.For a 2 discount rate, you might as well buy guaranteed bonds.Dont justify the purchase of a company just because it fits the numbers.
What Youll Learn, the difference between an investors discount rate analysis and corp finance discount rates.An alternative to using discount factor to adjust for risk is to explicitly correct the cash flows for the risk elements using rNPV or a similar method, then discount at the firm's rate.Like Buffett, I have a minimum return rate that I want and that happens to be between 7-12 in todays world of low interest rates and dependent on the type of company.In financial theory, if there is a choice between two mutually exclusive alternatives, the one yielding the higher NPV should be selected.Also consider that discount rates in general operate within a tight range.(If the investor could do better elsewhere, no projects should be undertaken by the firm, and the excess capital should be turned over to the shareholder through dividends and stock repurchases.) More realistic problems would also need to consider other factors, generally including: smaller time.Yet another issue can result from the compounding of the risk premium.