I have been asked numerous questions regarding the Discount Rate (DR) and present value Factor (PVR) and how to use them in the assignment.

The DR will be based on the opportunity cost (ie % interest you have foregone by using your money to purchase the SUV)

If you use a nominal rate which includes inflation you will need to include inflation in all your operating costs

If you wish to convert the nominal rate to the real rate of return (and not need to include inflation in all costs) then the following formula must be applied :

1 + n – 1

1 + i

n = nominal rate in decimal

i = inflation rate in decimal

say this gives you an answer of 1.75 % as the DR you will not find the relevant PVF on the PVF tables supplied in the classexcersises.

You will need to convert the DR of 1.75% into the relevant PVF for the 6 years by calculating the PVF’s using the following formula

1

(1 + r)n

where r = DR in decimal and

n = the year ie (1 -6)

eg year 2 would be

1 = 0.966

( 1 + 0.0175) * (1+ 0.0175)

you would then use this PVF to bring Y2 costs back to today (you would still have to calculate years 1,3,4,5,6)

I have been asked numerous questions regarding the Discount Rate (DR) and present value Factor (PVR) and how to use them in the assignment.

The DR will be based on the opportunity cost (ie % interest you have foregone by using your money to purchase the SUV)

If you use a nominal rate which includes inflation you will need to include inflation in all your operating costs

If you wish to convert the nominal rate to the real rate of return (and not need to include inflation in all costs) then the following formula must be applied :

1 + n – 1

1 + i

n = nominal rate in decimal

i = inflation rate in decimal

say this gives you an answer of 1.75 % as the DR you will not find the relevant PVF on the PVF tables supplied in the classexcersises.

You will need to convert the DR of 1.75% into the relevant PVF for the 6 years by calculating the PVF’s using the following formula

1

(1 + r)n

where r = DR in decimal and

n = the year ie (1 -6)

eg year 2 would be

1 = 0.966

( 1 + 0.0175) * (1+ 0.0175)

you would then use this PVF to bring Y2 costs back to today (you would still have to calculate years 1,3,4,5,6)

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Posted on May 14, 2016Author TutorCategories Question, Questions