CAS EC 102 Lecture Notes - Lecture 4: Discounting

• School: Boston University
• Department: Economics
• Course: CAS EC 102
• Professor: Jay Zagorsky

Document Summary

@ 5% interest for 1 year = ----for another year = . 25. A dollar today is worth more than a dollar in a year. Because a dollar today could be in a year (with interest) But in a year could be sh. 50 today (going backwards, subtracing interest) Usually just ends up being: cash x 1. 10 or 1. 05 or 1. whatever. *can only compare things at the same point on the imeline* ,000 today ,000 in a year vs. ,000 in a year. ,000 in a year ,454. 55 today vs. ,000 today. To go backwards: cash / (1 + r) So compare negaive net beneits: -,545. 45 x (1. 10) = -,000. *to translate forward: muliply by (1 + r) aka interest. *to translate backward: divide by (1 + r) aka discount factor. Date 0 is today, date 1 is end of irst year, date 2 is end of second year, etc.