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a company in 5 years time will have to pay environmental costs of $5m.
PV $5m and relevant discount rate is 10%Therefore the provision for 5 years will be made for:
$5m x 0.62092 = 3,104,600and the provision for the following year will be:
$5m x 0.68301 (disc. for 4 years)= 3,415,050How will found the amounts of “0.62092 and 0.68301”?
Thank you
You can look it up in present value tables:
https://www.accountingcoach.com/online-accounting-course/present-value-of-one.html
The discount rates are along the top, and the number of years is down the left side. So just find the interest rate along the top (10% in this case) and move down to the number of years and you’ll get:
* year 5 = 0.621
* year 4 = 0.683or.. if you prefer, or aren’t given present value tables in an exam, you can quite easily work it out on standard calculator. The forumlua is:
1/(1+r)n where r is the discount rate and n is raised to the power of number of years or periods. So in this example r = 10 and n = 5 years. To solve in this way, do the bit in brackets first to get 1+r:
1+0.10 = 1.1
Then you have raise this to the power of 5 ie the number of periods (so you multiply it by itself 5 times):
1.1*1.1*1.1*1.1*1.1 = 1.61051
then divide 1 by the answer, so 1/1.61051 = 0.62092
So that’s your answer for 5 years.
If you use a scientific/maths calculator, then it will have a raise to the power function that will do that bit for you, but I’ve found it useful to be able to work it out on a standard calculator for times, such as in study texts, where no present value tables are given.
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