discounting

Examples of discounting in the following topics:

• NPV Profiles

  • The NPV Profile graphs the relationship between NPV and discount rates.
  • The NPV calculation involves discounting all cash flows to the present based on an assumed discount rate.
  • When the discount rate is large, there are larger differences between PV and FV (present and future value) for each cash flow than when the discount rate is small.
  • The independent variable is the discount rate and the dependent is the NPV.
  • It is the discount rate at which the NPV is equal to zero.

• The Discount Rate

  • The Fed makes loans to depository institutions and charges different discount rates for each of discount windows.
  • The discount rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from the Fed's lending facility, the discount window.
  • All discount window loans are fully secured.
  • (Because primary credit is the Federal Reserve's main discount window program, the Federal Reserve, at times, uses the term "discount rate" to mean the primary credit rate. ) The discount rate on secondary credit is above the rate on primary credit.
  • The discount rate for seasonal credit is an average of selected market rates.

• Discounting

  • An example would be a discount on snowmobiles during the summer.
  • The intention of such discounts is to spread demand over the year.
  • For example, a 2% discount on bills paid within 10 days is a cash discount.
  • Trade discounts, also called functional discounts, are payments to distribution channel members for performing some function.
  • Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked.

• Discounted Cash Flow Approach

  • Using this equation, we find the discounted present value of the asset to be $3,612.27.
  • This finds discounted present values (DPV).
  • This interest rate is commonly referred to as the "discount rate" when discounting values from the future to the present.
  • Divide this value by the discount rate minus the assumed growth rate.
  • Calculate the value of a project using the discounted cash flow approach

• Trade Allowances

  • For instance, hairdressers can go to the manufacturer to get a discount for buying in bulk.
  • Such a discount might also be used to gain shelf space or a preferred position in the store.
  • Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.
  • The larger the purchase, the larger the discount.
  • Hairdressers can go to the manufacturer to get a discount for buying in bulk.

• Discounted Payback

  • Discounted payback period is the amount of time to cover the cost, by adding positive discounted cash flow coming from the profits of the project.
  • Assuming the discount rate is 10%, we would apply the following formula to each cash flow.
  • Discounted Cash Flow at 10%: Year 0: -2000, year 1: 909, year 2: 827, year 3: 1503.
  • The next step is to compute the cumulative discounted cash flow, by summing the discounted cash flow for each year.
  • Bundesbank discount interest rates from 1948 to 1998.

• Bonds Issued at a Discount

  • When a business sells a bond at a discount, it must record a discount balance in its records and amortize that amount over the bond's term.
  • In addition, that discounted amount must be amortized over the term of the bond.
  • That is the discount amount.
  • As the company pays interest, the discount on the bond payable is amortized.
  • A bond's discount amount must be amortized over the term of the bond.

• The Discount Rate

  • Discounting is the procedure of finding what a future sum of money is worth today.
  • Another common name for finding present value (PV) is discounting.
  • Discounting is the procedure of finding what a future sum of money is worth today.
  • The interest rate, in this context, is more commonly called the discount rate.
  • The discount rate represents some cost (or group of costs) to the investor or creditor.

• Present Value of Payments

  • The value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • Therefore, the value of a bond is obtained by discounting the bond's expected cash flows to the present using an appropriate discount rate.
  • In practice, this discount rate is often determined by reference to similar instruments, provided that such instruments exist.
  • The formula for calculating a bond's price uses the basic present value (PV) formula for a given discount rate .
  • The present value of an annuity is the value of a stream of payments, discounted by the interest rate to account for the payments being made at various moments in the future.

• Cash Flow

  • One way to get cash flow quickly is through seasonal discounts .
  • An example would be a discount on snowmobiles during the summer.
  • The intention of such discounts is to spread demand over the year.
  • Another option is cash discounts.
  • A quick way to generate cash flow is to offer seasonal discounts.