# Prices of Producer goods part 2

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• #17658

Hi,

In lecture on Prices of Producer Goods(Part 2), I do not comprehend how the values for DMRP is derived.
Using a 5% a year discount rate, and an MRP of 5000 dollars for the oven, shouldn´t the discount rate be 4750?How comes this value is 4762 dollars?
The same applies for the rest of the DMRP values, it seems like it is not exactly 5% of the values inputed for the subsequent years..(6000,7000,8000,8500,etc)
How exactly are these values derived?
…also for the rental prices of producer goods, the DMRP aren’t exactly 5% of the MRP..at least not for all the values.I am assuming these are rounded off to whole numbers.
Help would be very much appreciated.

Regards
Akanimo

#17659
jmherbener
Participant

The discount formula is the complement to the compound formula. The future value of a present sum of money put on interest for one period is FV=PV(1+i). And for n periods it is FV = PV(1+i) raised to the n power. So if I lend \$1,000 for one year at an annual interest rate of 0.05, then in one year my \$1,000 compounds into \$1,100. Therefore, if I am to receive \$1,050 in one year its present value is the sum of money I would need to lend on interest now for it to accumulate to \$1,050 in one year, namely \$1,000. The formula is PV = FV/(1+i). And for n periods it is PV = FV/(1+i) raised to the n power.

Thus, in the lecture \$5,000 to be received in one year at a 0.05 rate of interest is \$5,000/1.05 = \$4,762.

And \$6,000 to be received in two years is \$6,000/(1.1025) = \$5,442

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