We’re rewarding the question askers & reputations are being recalculated! Read more.

# Tag Info

71

In other words, math. All the other answers are great, but I thought I might add something concrete to clarify slightly. Consider a counterexample. Suppose I borrow \$120000 at 1%/month interest (I know mortgages are usually priced with annual rates, but this will make the math simpler). Further suppose that I want to pay a fixed amount of principal each ...

33

It's not correct. You pay both principal and interest on amortized loans. What happens is that you pay the interest accumulated on that principal during the period. As the time passes - some of the principal is paid off, allowing you to leave more for the principal because the interest becomes less. Thus the longer in the term - the quicker the growth of the ...

20

Assume a month to month mortgage. This is a simplification, but it will illustrate the point. Borrow \$100,000 at .5% a month. Make a payment of \$1000 each month. So, for the first month, it will cost you \$500 in interest to borrow the entire balance for one month. When you make your payment, \$500 goes to interest, and 500 goes to principal. Your new ...

11

Banks don't make you pay different amount of principal at different stages of the mortgage. It's a consequence of how much principal is left. The way it works is that you always pay off interest first, and then any excess goes to pay off the principal. However early in the mortgage there is more interest, and so less of the payments go toward principal. ...

9

Apply the discount before you apply the tax (unless your specific tax jurisdiction calls for the tax to be applied to the pre-discount value - NOTE that this would not be normal in the USA/EU). Then calculate the tax normally on the now-discounted pricing.

6

The operation is by no means arbitrary. It's a reversal of the future value formula used to calculate compounded returns. Suppose you have a bank account that pays 1% per year. You deposit \$100 in that account. In one year you'll earn \$1 (1% of \$100) in interest, so mathematically your value after one year is: 100 + (100 * .01) = 100 * (1.01) = 101 or ...

4

Banks make you pay accrued interest on the current outstanding balance of the loan each month. They want their cost of capital; that's why they gave you the loan in the first place. On top of this, you will want to pay some additional money to reduce the principal, otherwise you're paying interest forever (this is basically what large companies do by issuing ...

3

A quick Excel calculation tells me that, if you are earning a guaranteed post-tax return of 12% in a liquid investment, then it doesn't matter which one you pick. According to the following Excel formula: =PV(0.12/12,24,-100) You would be able to invest ₹2,124 now at 12% interest, and you could withdraw ₹100 every month for 24 months. Which means that ...

2

It's possible (I haven't read the book to know the context) that the additional risk of the investment is equal to the growth. The formula for the present value of a growing perpetuity is D1/(r-g), where D1 is the income in the next period, r is the discounting rate, and g is the rate of growth of the income. So just using a risk-free rate in the ...

2

It will be easier to understand if you treat interest the following way: it's the sum you pay the bank to get permission to not return the whole principal right now. Like you borrowed one million and then the bank comes after that million and you're allowed to pay some relatively small sum (like one thousand) so that the bank doesn't bother you for one month....

2

DCF = 'discounted cash flow'. so, you build a model that has (cash) revenues minus (cash) expenses. It doesn't matter if the expenses (outflows) are for supplies, labor, or reinvestment of capital. In the end you get a net cash flow (including all cash costs), and you project that forward. Then discount it back to today.

1

YTM is typically presented as an annual number. To your second point, returns don't typically include separate inflation adjustments or discounts. Those factors would already be considered in the yield the market is willing to pay.

1

I think you are misunderstanding the question. The Payment sequence is a given, someone offers you the three options. The explicit numbers offered are not implying an interest between them, this is just what is offered. The question you are supposed to answer is which of the three payment sequences are best for you, under the assumption of a market with a ...

1

That is not how VAT usually works. To my knowledge (IANAL, but have coded quite a few systems to handle VAT) VAT is always to be calculated on the total sum of an invoice (if you have different rates, you have to calculate one sum for every rate) VAT is always rounded up. Example: This is simple: So let´s say you have an item that costs just 7 cent´s. ...

1

If you’re discounting the total price, then you’re discounting the tax by the same amount. The tax is calculated on what you actually charge, not on the headline price before discounts are applied. Just apply the discount to each line item and then calculate the tax as normal on the discounted price. Or if you don’t want to calculate the discount for each ...

1

Has the author of the article made a mistake? No - the terminal value discounts the perpetual growing cash flows after year N back to year N using the discount rate d, then discounts the equivalent cash flow in year N back to the present time.

1

When calculating the NPV, is there anything I need to do in between the project start date outlay (Nov 2017), and the first cash inflow (July 2019). Do I need to discount the cashflow to the present, and if so, how? Yes, you need to discount every cash flow to the present time, not just the first one. When discounting cash flows, the appropriate discount ...

Only top voted, non community-wiki answers of a minimum length are eligible