Discount rate

Another way to kind of just talk about this is to get the present value of 110 a year from now, we discount the value by a discount rate.

The probability of reaching S prime given that we started state S and apply action A.

So 2009 money, that's worth 1.

And it just depended on how the mathematics work out.

If I could get it for 90, that's a good deal for me.

Then to discount money in the future to the present, we divide it by 1 plus the discount rate so this is a 5 discount rate.

So why is that?

That's really important for now, just for this one quiz.

We saw that choice number one was the best.

This is the difference between the two.

But the big learning from this is how dependent the present value of future payments are on your discount rate assumption.

But if you were to present value this let's say they make 1 forever going into the future and you were to present value this using a discount rate.

It's all assumption driven.

What you have already is a very powerful tool.

To compound the amount of money we invest we multiply the amount we invest times 1 plus the yield.

Because if it's a year from now, you'd have to discount it by the one year interest rate.

We have agreed on the rate of discount.

Because this is what all of our present values and our discounted cash flow, this type of dividing by 1 plus the discount rate to the power of however many years out, this is what all of that's based on.

We give a 10 discount for cash.

Will you give any discount if I pay in cash?

I thought we had discussed a cash discount.

And this is scenario three.

But you can almost justify any present value, by picking the right discount rate.

But let's generalize even more.

Now what can we do ?

We have agreed on the rate of discount.

Anyway.

So once again we have verified, by taking the present value of 110 in 2 years to today, that its present value if we assume a 5 discount rate.

So you want to divide it by, let's say we use 11 as a discount rate.

Then we get the Q value of 100 minus the Q value of zero, and the discount rate is 90.

And frankly, what we're learning here is a discounted cash flow.

60 off.

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And this has led in Congo basin, and other parts of the world, to what is known as the bush meat trade.

Golden ratio

Pull the fucking trigger, do it!

Pull! Pull!

These are 30 percent off.

Which is essentially you take the original amount you borrowed, the interest rate, the amount, the fee that you pay every year is the interest rate times that original amount, and you just incrementally pay that every year.

And then the amount that you owe me after one compounding period is 1 times the principal, plus my annual interest rate so in this case it's r divided by the number of times I'm compounding.

Pulled the trigger.

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