Microeconomics · free preview
Present Value and the Price of Time
A dollar later is worth less than a dollar now, present value discounts future payments by the interest rate, and the net present value rule ranks every investment, degree and pension.
1. Compounding forward, discounting back
Compounding forward, discounting back
2. The NPV rule
The NPV rule
3. Shortcuts
Shortcuts
4. The rate's keepers
The rate's keepers
5. Discounting
The interest rate is 10 percent. What is the present value of 121 dollars arriving in exactly two years?
6. Choosing the rate
A firm's cash flows are projected in real terms, ignoring inflation. Which rate should it use for NPV?
7. The perpetuity
A bond pays 6 dollars a year forever, and the interest rate is 4 percent. Compute the bond's present value in dollars, and write the number.
8. Discounting a single sum
The interest rate is 10 percent. What is the present value of 100 dollars arriving in exactly two years?
9. The NPV rule
A project costs 90 thousand dollars today and returns 100 thousand in one year. The interest rate is 8 percent. What should the firm do?
10. Another perpetual bond
A bond pays 5 dollars a year forever, and the interest rate is 5 percent. Compute the bond's present value in dollars, and write the number.
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