Discounting future income and cost

• $1000 today will grow, if put in a bank.• At 1% interest– Compounded annually

• You’ll have $1010 after one year.– $10 is 1% of $1000– $1010 = $1000×(1 + interest rate)

• Next year value = This year value × (1 + interest rate)

So …

• $1000 today will grow, if put in a bank.• At 1% interest– Compounded annually

• You’ll have $1020.10 after one year.– $10 is 1% of $1000– $10.10 is 1% of $1010.– $1020.10 = $1000×(1 + interest rate)2

• Value in two years= This year value × (1 + interest rate) 2

So …

Present value