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.
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