Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Unwinding of a discount
- This topic has 1 reply, 2 voices, and was last updated 6 years ago by MikeLittle.
- AuthorPosts
- October 18, 2017 at 4:02 pm #412301
Dear Sir,
I have just come across this topic in F7. Could you please explain in more detail? Or give an example. Where could I read more about it?
Thanks.
October 18, 2017 at 5:33 pm #412316Anna! If I have to pay $1.26 in 3 years’ time and the cost of capital for me is 8% the I should invest how much TODAY in order to have $1.26 available in 3 years’ time?
I need to discount the future payment to arrive at the equivalent TODAY figure so that I shall have $1.26 available in 3 years
So!
$1.26 / (1.08, 1.08, 1.08) = $1.00 today’s value of the future cash payment of $1.26 in 3 years where my cost of capital is 8%
This exercise is called discounting and the concept is known as discounted cash flows or dcf
Now, if I recognise $1 today for this obligation in 3 years, by the end of 12 months that obligation is 1 year closer so I will need to unroll the discount
$1 x 1.08 = $1.08 and the obligation will now be shown as $1.08
That added $0.08 represents the finance cost associated with unrolling the discount
Is this getting any clearer?
If so, fine
If not, try John’s lectures for F2 on this site
OK?
- AuthorPosts
- The topic ‘Unwinding of a discount’ is closed to new replies.