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Can anybody help me to understand example 3, chapter 1, P2 I cannot understand from where the discount factor 1, .9090 and .826 come from?
Thank you
This is the discount factor for year 0, year 1 and year 2 using a cost of capital of 10%. The present value of $1 today is $1.
The present value of $1 in one year’s time is $1 * the discount factor for 1 year @ 10%.
This is .90909 and is calculated by dividing 1 by ( 1 + .10 ). So, 1 / 1.1 = .90909
Similarly, to get the discount factor for year 2 we divide 1 by (1.10)(1.10) = .82645
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