interest rate. This interest rate will reflect the rate of return on other available financial investment

opportunities, which is the opportunity cost of investing financial capital, and also a risk premium (that is,

using a higher interest rate than the rates available elsewhere if this investment appears especially risky). In

this example, say that the financial investor decides that appropriate interest rate to value these future

payments is 15%.

Table C1 shows how to calculate the present discounted value of the future profits. For each time period, when

a benefit is going to be received, apply the formula:

Payments from Firm

Present Value

$15 million in present

$15 million

$20 million in one year

$20 million/(1 + 0.15)1 = $17.4 million

$25 million in two years $25 million/(1 + 0.15)2 = $18.9 million

Total

$51.3 million

TABLE C1 Calculating Present Discounted Value of a Stock
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