Discounting Cashflows – A Deeper Dive

Welcome! This post is meant to accompany Chapter 5 and Appendix to Chapter 5 “On Discounting Cashflows” in my book “The Financial Rules For New College Graduates – Invest Before Paying Off Debt And Other Tips Your Professors Did Not Teach You.” (Praeger, April 2018.)

I’m convinced the only way to really learn discounting cashflows math is to practice with a spreadsheet. The only way to gain intuition about how this math is used in the real world – how it can help you build wealth – is through a bit of spreadsheet practice.

In this first video I show how to build a simple calculator for determining the present value of future cashflows. This is the fundamental math used in investing in assets such as stocks and bonds. It’s also how we would value everything from annuity payments to pension payments to public liabilities.

In this second video, I show how to discount more than one cashflow. The key point is that each separate future cashflow needs it own discounting formula.

The next video shows how to discount cashflows using other-than-annual discounting rates. This is relevant because in the real world cashflows don’t just come once a year. They could be semi-annual (like a bond) or quarterly (like a stock) or monthly (like debt payments). We need to adjust our calculation by adding one extra variable – the number of compounding periods per year – as I show in this third video.


Learning how to discount cashflows can get more complex from here, especially for finance professionals, but the basic math shown here is both within the grasp of non-finance professionals as well as applicable to many important personal finance situations.

 

 

The_Financial_Rules

Please see related posts:

On Compound Interest – A Deeper Dive

Book Review: The Intelligent Investor by Benjamin Graham

 

Post read (96) times.