2007-02-10 21:33:56 · 3 answers · asked by Anonymous in Business & Finance ➔ Investing
Both the above are wrong or is only partially right. It calcultes the amount of money, cash or investment required now to produce those cash flows at the returns on which it is dicounted.
Value of money and all are not that right.
2007-02-11 02:42:38 · answer #1 · answered by Mathew C 5 · 0⤊ 0⤋
Good question. Todays $ will not buy as much in 5-10 yrs so discounting allows for this.
I disagree with Matthew. Read the question. "why is it important"
It's important because $1 today is worth "less" than say 5 years down the road. Let's say it's worth 85 cents in future dollars, then the discount rate is 15%. this is basic accounting principal.
2007-02-10 21:42:58 · answer #2 · answered by americanmalearlington 4 · 0⤊ 0⤋
In order to determine the value today of those cash flows you need to discount them. If you were to sell the investment someone would only pay the present value of the investment because they would have to wait on the cash flows which are worth less each year because of inflation.
2007-02-10 22:25:38 · answer #3 · answered by waggy_33 6 · 0⤊ 0⤋