Discounting future income and cost. $1000 today will grow, if put in a bank. At 1% interest – Compounded annually You’ll have $1010 after one year. –

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Presentation transcript:

Discounting future income and cost

$1000 today will grow, if put in a bank. At 1% interest – Compounded annually You’ll have $1010 after one year. – $10 is 1% of $1000 – $1010 = $1000×(1 + interest rate)

Next year value = This year value × (1 + interest rate) So …

$1000 today will grow, if put in a bank. At 1% interest – Compounded annually You’ll have $ after one year. – $10 is 1% of $1000 – $10.10 is 1% of $1010. – $ = $1000×(1 + interest rate) 2

Value in two years= This year value × (1 + interest rate) 2 So …

Present value