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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › How to calculate discount rate.
Hi Mike,
Its a silly question which I should know by now.
But I just cant work it out.
A provision to be made now will be the present value of 5million in 5 years time.
discount rate is 10%.
I think the formula we use is
Future Value of investment / (1 + rate of interest)
which doesn’t give the right answer.
The provision will be made for
5m x 0.62092 3104600
Really appreciate your help.
Thank You.
“…
Wrong question!
You mean (I think):
“… what is the present value (today) of 5million in 5 years’ time where the rate of interest / cost of capital is 10%)”
$5,000,000 in 1 year has a present value (pv) of $5,000,000 * 1/1.10 = $4,545,454
$5,000,000 in 2 years has a pv of $5,000,000 * 1/1.10 * 1/1.10 = $4,132,231
$5,000,000 in 3 years has a pv of $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 = $3,756,574
In 4 years pv is $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 = $3,415,067
In 5 years pv is $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 = $3,104,607
Ok now?