Application of Discounting
Suppose that the individual is to receive P_{n} amount in n years and that the market rate of interest is i, Solving equation for P_{0}, the present value of future income equals P_{n} divided by (1 + i)^{n}. In equation form:
P_{0} Shows present value of P_{n} receivable in n years when the market rate of interest is i and is called the discounted present value.
Thus, in general, if an individual is to receivable in n years when the market rate of interest is i and is called the discounted present value.
We may illustrate this with the help of an example. If an individual is to receive $ 105 at the end of one year and the market rate of interest is 5 percent, the discounted present value of $ 105 will be calculated as follows:
Similarly, we can find out the present value of any series of incomes receivable at future dates. We may calculate the present value of the income stream by discounting each portion of that series.
In our example above we have assumed the rate of interest to be 5 per cent. At this rate of interest $ 105 receivable I none year has a present value of 105/(1+0.05) or $ 100. Similarly, the present value of $ 110.25 receivable in two years is 110.25/(1+0.05)^{2} or $ 100 Consequently, the value, of in income stream consisting of $ 105 receivable in two years is $ 100
Thus, the present value of income stream is the sum of the present values of each of its components. Using the symbol, PV, to denote the discounted present value and R_{1}, R_{2},….., R_{n} to show income stream receivable at the end of 1, 2,…., n years, we can generalize the previous result into n periods.
The terms t represent the present value of the income stream receivable at the end of the first year, second year and n^{th} years respectively.
Services: - Application of Discounting Homework | Application of Discounting Homework Help | Application of Discounting Homework Help Services | Live Application of Discounting Homework Help | Application of Discounting Homework Tutors | Online Application of Discounting Homework Help | Application of Discounting Tutors | Online Application of Discounting Tutors | Application of Discounting Homework Services | Application of Discounting