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032115presentvalue

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Question 1: In the context of present value analysis, what is the discount rate? How does the discount rate affect the present value calculation? If the present value of a future return is calculated using a discount rate of 8%, what can we expect the present value analysis to reveal if the discount rateisisthe changed to 10%? Whatreturn if the on discount rate changed to 6%? The discount rate basically the required a project or is investment. The required return is basically the return you could earn on an alternative project or investment. In other words if you are considering an investment and the alternative is to leave your money in the bank earning 10% then the discount rate would be 10% because the alternative investment would only be considered if the return is at least the same 10%. The discount rate is used to determine how much a $ amount to be received at some point in the future is worth today. Money received in the future is worth less than money you have today because if you have the money today you could invest it and it would be worth more in the future. Discounting is basically the opposite of compunding. So if you could earn 10% per year then money to be received a year from now is worth 10% less than money you have today. So, if the discount rate is Question 2: Brass Knuckle Company wants to buy a new machine which will not increase its revenues, but that will reduce its costs by $10,000 per year. The machine will cost $60,000 and will have a useful life ...
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