Principles of Finance: Unit 5, Present Value (aka Another Twist)

Hit play to learn all about present value.

CoursesFinance Concepts
Principles of Finance
FinanceFinancial Responsibility
Personal Finance
Finance and EconomicsPrinciples of Finance
LanguageEnglish Language
Life SkillsPersonal Finance
SubjectsFinance and Economics

Transcript

00:27

percent a year for the next few decades and you'd love to just put your money in

00:31

an index fund and well forget about it and go play some golf [man hits golf ball]

00:35

so the question what price buys you out of this annuity and yeah forget taxes

00:40

because well in most structures it's way better to leave the money coming in in

00:44

small payments over long periods of time if you take a lot of money out in year [stacks of money falling]

00:49

one well if you'd likely be taxed at a much higher rate than otherwise but

00:53

that's a separate issue from this problems fine illustration here well

00:56

here's the discount rate and this is what the math looks like so you got your

01:00

one you're gonna take out ten thousand bucks

01:02

you're gonna divide it by the interest rate there it's it's one plus point one

01:05

at point one for ten percent of your compounding notice it's to the first

01:09

power because it's after one year of compounding and you get to nine grand

01:12

and change and then a year two you take out another ten grand the present value

01:16

of it you have to discount by two iterations of that ten percent of your

01:21

thing you can you get eighty two hundred bucks

01:23

then we scoop all the way down to year five that's ten thousand dollars given

01:27

to you five years from now with no risk associated on the premium on top of it

01:31

and you're gonna guess that ten percent a year is about your opportunity cost of

01:35

compounding in the market that's one plus 0.1 there so you get one point one

01:39

to the fifth power and if you divide that into ten thousand will you get

01:43

sixty two hundred bucks and change okay so then you just add up this column this

01:47

stuff over here the nine grand plus eighty two hundred plus seventy got and

01:50

so on and you get about thirty eight grand so using the discount rate of 10%

01:55

a year ie the opportunity cost of what you could do with the money deploying it

01:58

elsewhere while the dough today is worth yeah about thirty eight grand

02:02

steep discount from the fifty thousand dollars you thought you'd won great

02:06

marketers those lottery people well the exercise here is really

02:09

important to understand professionals use present value technique

02:13

to value companies in the stock market and these flows don't just apply to

02:18

bonds or promise series of payments they apply to companies and all kinds of [people handling money]

02:23

other investing things that are coming your way in the meantime keep cursing

02:26

Bezos name to the heavens for tricking you because as long as you're near a [man is angry at computer]

02:30

computer microphone well he's probably listening or trying to sell you

02:33

something