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What is 'discounted back to the present'? As Buffett has often taught, the intrinsic value of an asset is the cash it will earn from here to eternity, discounted back to the present. However, if your estimated growth rate is greater than your discount rate, you get a value of infinity.
Nov 2, 2018 2:21 PM
Answers · 7
In plain terms, "discounted back to the present" is referring to a calculation done in finance with future cash earned to value the cash earned in the future as it would be valued today. This is done because the purchasing power and value of cash changes over time with inflation and so when you are estimating or projecting in the future but comparing to today, you must change the value of your estimate to match today. I hope that's clear.
November 2, 2018
The money is "discounted" because it doesn't fall in your pocket in year n (2018) but in year n+1 (2019). It is therefore less valuable. The same for the money earned in year n+2, etc etc
November 2, 2018
'Discount rate' is a complicated calculation. https://www.investopedia.com/terms/d/discountrate.asp In the simplest terms, an asset is 'discounted back to the present' to determine its present (rather than future projected) value. "The discount rate also refers to the interest rate used in discounted cash flow analysis to determine the present value of future cash flows."
November 2, 2018
sometimes called simply "present value". eg you used to get tables showing you calulations of values of investments and future returns as current/present value, adjusted for earnings present value of annuity of one ..... . Invest $1,000 at 3% for 1 year ==> more dollars then, but the same value now, because that is what you can earn. It's often simple compound interest, simple exponentials.
November 2, 2018
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