Personal Finance & Money Stack Exchange
Personal Finance & Money Stack Exchange

Questions tagged [discounting]

The change in value of a cash flow due to time applied at a given interest rate. Most investment formulas use this.

32 questions
39
votes
7 answers

Why do banks want you to pay off interest before principal?

When you take out a traditional mortgage the first payment you make to a bank pays off mostly interest and then later payments start paying off principal. What is the reason for this? Is it just a historical accounting/industry convention? Or is…
bernie2436
  • 819
  • 1
  • 8
  • 7
12
votes
5 answers

Why do we ONLY care about the future of companies like Netflix? It was very profitable in the past

I understand in a startup that has not created revenue yet, if the “future” is predicted to be bad for the company, the value of the company only would drastically go down (for the only worth was on future hopes). However, in an established company…
Jack
  • 161
  • 1
  • 8
10
votes
6 answers

Why making additional payment to mortgage counts towards principal? Why does it matter?

When it comes to mortgage advice, some people recommend making an extra payment. The logic is :"These extra payments are automatically applied to your principal, not interest". Why does it matter if the extra payment is applied to the principal and…
Victor123
  • 16,084
  • 40
  • 133
  • 234
4
votes
3 answers

How can I calculate yearly interest of my investment gain?

I'm trying to figure out the yearly interest of a potential investment. Lets say I invested $10 000, 13 days later i cash out and I now have $10 500. The interest here is 4,76% for 13 days. But can I convert it to a yearly interest?
Jason94
  • 155
  • 5
4
votes
1 answer

How to deal with discount when invoice has multiple line items and multiple tax rates?

I am stumped at how to work out the tax for an invoice, when discounts are applied to invoices that have multiple line items with multiple tax rates? See my example invoice below: SomeItemOne(Tax: 20%) - Cost:£2.45 | Qty:1 (Line Sub Total: £2.45)…
YodasMyDad
  • 155
  • 5
3
votes
3 answers

Given a certain yearly savings, how much can I spend on a capital improvement? NPV of future cash flow

I'm seeking a simple online calculator, or explicit instructions for a spreadsheet, for answering simple real-world scenarios like this: Our insurance company is offering a 30% discount on an $8200/year commercial policy, if we install sprinklers. …
Bryce
  • 2,580
  • 1
  • 20
  • 29
3
votes
5 answers

Question on using the interest rate on a loan as the hurdle rate for a net present value calculation

I'm reading a real estate investing book that provided the following example. You finance a property for $100,000 using a HELOC with a 5% interest rate. The property generates $2,000 in cash flow each year for four years. You sell in the fifth year…
Tyler K
  • 33
  • 5
3
votes
3 answers

Discounted cash flow: meaning of terminal value formula

I am reading a book about stock valuation using fundamental analysis — Accounting for Value by Stephen Penman. The following discounted cash flow (DCF) formula appears in chapter 2 with almost no explanation: Where r is the required rate of return,…
Flux
  • 17,301
  • 12
  • 74
  • 138
2
votes
1 answer

When does it make sense to buy an annual rather than a monthly pack?

My TV provider offers me a monthly package, but lets me prepay for a longer duration at lower price. Here are the options: ₹100 monthly ₹567 semi-annually ₹1,098 per annum ₹2,100 biennial All these are prepaid, not postpaid. Assume that I have an…
Kartick Vaddadi
  • 672
  • 1
  • 4
  • 15
2
votes
1 answer

Relationship between interest rates and DCF discount rates

I've been reading that interest rates lower the over future cash flows of equities, hence their decline as money can be moved elsewhere for better returns. What is the direct relationship between interest rates and the rate used in a DCF? For…
pstatix
  • 363
  • 3
  • 10
2
votes
2 answers

Effective Interest Rate Calculation in Discounting

Quoting from "Numbers Guide" book by The Economist (sixth edition): "An even bigger discrepancy occurs with discounting of interest on many personal or consumer loans. For example, an advance of $1,000 at 12.5% discounted in advance and repayable…
Eugen
  • 273
  • 3
  • 8
2
votes
0 answers

How to account for time-value of money in a total cost of ownership calculation?

I am attempting to conduct a total cost of ownership (TCO) analysis for purchasing a vehicle, to compare the TCO between an electric vehicle and a conventional gasoline car. I would like this calculation to be as accurate as possible. Given my TCO…
Runeaway3
  • 2,918
  • 6
  • 24
  • 42
2
votes
3 answers

Why do value investors obsess over finding intrinsic values instead of discount rates (expected returns)?

From what I read about value investing, value investors seek to buy stocks that sell below their "intrinsic value". To that end, they use stock valuation models to find the all-important "intrinsic value". Some of the simpler stock valuation models…
Flux
  • 17,301
  • 12
  • 74
  • 138
2
votes
4 answers

Warren Buffett's calculation of the value of the company — very low discounting rate

I was read the book "The Buffett Way". The book claims that Warren Buffett uses a simple calculation to calculate the intrinsic value of a company. The regular way is to estimate future earnings and then use a discounting rate to calculate the…
user93353
  • 155
  • 7
1
vote
1 answer

Calculating NPV for future cash inflows

I have a question, where I am calculating the net present value of a project we are considering if it is beneficial or not. The project starts and the sales (cash inflows), don't start until a few years in. ie. there is several years of R&D before…
tsaunders
  • 13
  • 3
1
2 3