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Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › How to calculate discount rate.
Hi Mike,
Its a silly question which I should know by now.
But I just cant work it out.
A provision to be made now will be the present value of 5million in 5 years time.
discount rate is 10%.
I think the formula we use is
Future Value of investment / (1 + rate of interest)
which doesn’t give the right answer.
The provision will be made for
5m x 0.62092 3104600
Really appreciate your help.
Thank You.
“…
Wrong question!
You mean (I think):
“… what is the present value (today) of 5million in 5 years’ time where the rate of interest / cost of capital is 10%)”
$5,000,000 in 1 year has a present value (pv) of $5,000,000 * 1/1.10 = $4,545,454
$5,000,000 in 2 years has a pv of $5,000,000 * 1/1.10 * 1/1.10 = $4,132,231
$5,000,000 in 3 years has a pv of $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 = $3,756,574
In 4 years pv is $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 = $3,415,067
In 5 years pv is $5,000,000 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 * 1/1.10 = $3,104,607
Ok now?
Hi Mike, I have this same question. Is there a quicker way in the exam to work out the x 1/1.10 5 times rather than typing it in 5 times on your calculator?
Hi,
Yes, there is but you will be given the discount factor in the exam. If you wish to look at how to do the discounting then you will need to go back to the Management Accounting paper.
Thanks