Let’s take a minute to talk about net present value calculations since they’re quite integral to the operation you’re trying to perform. So imagine that you have 100 dollars, and you have a bank account that you can put it in and get 3% interest. In one year that 100 dollars will be worth 103 dollars.
We can work that equation backwards as well, and find out what the PRESENT value of 103 dollars one year from now is, given that our DISCOUNT RATE is 3%. Remember, discount rate is always the percent interest that you could earn on the money if you had it in your possession. If you could ear 10% in the stock market on your money, your discount rate for figuring out what money is worth in today’s and tomorrow’s money would be 10%.
So, if I told you I wanted to borrow $1000, and I would pay you back one year from today, you would know that unless I paid you $1100 you would be losing money.
Alternately, if I asked you how much you would give me today if I gave you $1100 on year from now, you could tell me that you would give me $1000 in today’s dollars for $1100 of next year’s dollars.
