Discounted Loan

In the above example, the discount rate used was the annual compound interest rate offered by the bank. In business investment opportunities the appropriate discount rate is the cost of capital to the company. This may be calculated in different ways, but should always reflect how much it costs the oil company to borrow the money which it uses to invest in its projects. This may be a weighted average of the cost of the share capital and loan capital of a company. 

If money is borrowed, interest must be paid over the time period if money is loaned out, interest income is expected to accumulate. In other words, there is a time value associated with the money. Before money flows from different years can be combined, a compound interest factor must be employed to translate all of the flows to a common present time. The present is arbitrarily assumed often it is either the beginning of the venture or start of production. If future flows are translated backward toward the present, the discount factor is of the form (1 + i) , where i is the annual discount rate in decimal form (10% = 0.10) and n is the number of years involved in the translation. If past flows are translated in a forward direction, a factor of the same form is used, except that the exponent is positive. Discounting of the cash flows gives equivalent flows at a common time point and provides for the cost of capital. 

The advantage of using common stock to finance assets is that it does not incur nxed interest charges. Furthermore, there is no maturity date, as there is with all loans and most preference issues. Common stock can often be issued more easily than debt can be financed. However, the flotation costs of common stock can be quite high, especially when stock values are depressed, so that large discounts for the stock are needed to induce purchase. 

When the Revolution began, Lavoisier was still a director of the Saltpeter and Gunpowder Administration and also a director of the Discount Bank, the bank that had propped up the government by repeatedly making large loans to the Royal Treasury. After the Revolution, the bank continued to operate and provided currency by issuing banknotes and continued to lend the government money. On... 

Pipeline length, km Throughput, billion cubic meters p.a. (32 inch high pressure line) Wellhead cost of gas, /l,000 m3 Target rate of return (project discount rate for NPV calculations) Minimum acceptable transportation tariff to secure required NPV and loan coverage ratios, /l,000 m3 Minimum price of delivered gas to secure required NPV and loan coverage ratios, S/l, 000 m3... 

If a bank advertises a special discount of 25% on their regular 16% rate for a personal loan, what is the rate that they will actually charge ... 

The company store. Additional benefits with readily calculated dollar values come from the stores operated by large pharmaceutical companies. The companies make their own products available at substantial discounts to employees. Not only prescription drugs but over-the-coimter remedies, cosmetics, medical devices, and eye-care products are stocked. Other establishments that serve employees occupy company premises and include hair salons and credit unions. With nearly all the services of commercial banks, credit unions offer competitive interest rates for automobile loans, mortgages, checking and saving accounts, and certificates of deposit. 

Increasing competition has encouraged lenders to offer special incentives to attract new customers. These usually take the form of an initial discounted or a fixed-rate period, which will give the borrower lower payments or certainty over the size of the payments in the first few years of the loan. 

This is further complicated in making allowance for inflation effects and life-cycle costing. The normal US practice is to use a factor of about 3% as the normal difference between inflation and interest rates. However, in the United Kingdom the Treasury requires a 7% discount rate as the difference between inflation and the cost of a commercial loan (Unwin and Hall, 1993). This has a highly distorting effect on all life-cycle costing for UK highway structures. 

The coupon process represents the cash flow investors receive while they hold the bond. Assume that a bond s term can be divided into very small intervals of length dt and that it is possible to buy very short-term discount bonds, such as Treasury strips, maturing at the end of each such interval and paying an annualized rate r t). This rate is the short, or instantaneous, rate, which in mathematical bond analysis is defined as the rate of interest charged on a loan taken out at time t that matures almost immediately. The short rate is given by formulas (3.10) and (311). 

The price of a PO bond fluctuates with mortgage interest rates. As noted earlier, the majority of mortgages are fixed-rate loans. If mortgage rates fall below the PO bond s coupon rate, the volume of prepayments should increase as the individuals holding the underlying loans refinance them, speeding the stream of payments to the bondholder. The PO s price will rise both because of the faster cash flows and because the flows are now discounted at a lower rate. The opposite happens when mortgage rates rise. 

The discount rate should be equal to the actual rate of interest on long-term loans in the capital market or the average interest rate (cost of capital) paid by the borrower. The discount rate should basically reflect the opportunity cost of capital, which corresponds to the rate of return an investor would obtain if the funds were invested elsewhere with a similar level of risk. The discount rate therefore represents the minimum rate of return acceptable to the investor. When comparing alternative investmenis with different perceived risks, the discount rate can be increased for the more risky project investment so that a comparison can be made between the alternatives. 

A firm considers the issue of designing its global network of plants and distribution centers. The firm plans to produce a new product with sales expectations in many countries. The product is composed of many different subassemblies, but requires only one unit per subassembly (i.e., a two level product tree, with level 0 the final product and level 1 all its subassemblies). Subassemblies can be produced in some combination of facilities within the firm s market areas. In order to assemble the final product, distribution centers (DCs) can be located in various countries. To influence the firm s location decision, various governments are willing to grant to it tax incentives and loans with subsidized interest rates that reduce the facility costs. The firm wants to develop a network of plants and DCs that maximizes its discounted after-tax profit over the planning horizon for this product. 

Figure XIX-12 shows the calculated discounted payback period of the NDPC versus the local tariff on potable water under different terms of crediting (interest rate on the loan was assumed to be equal to the discount rate (Rd)). The calculations were performed using the DEEP code provided by the IAEA.

FIG. XIX-12. Discounted payback period of the NDPC vs. tariff on potable water, under different interest rates on the loan (taken equal to the discount rate Rd) rental payment for the transportable reactor unit is fixed at US 12 million/year. 

The economic comparison is based on the equivalent annual cost (EAC). The EAC is the cost per year of owning and operating an asset over its entire lifespan. EAC is often used as a decision-making tool in capital budgeting when comparing investment projects. The EAC can be calculated by multiplying the net present value (NPV) of a project by the loan repayment factor LRF. The loan repayment factor (LRF) is calculated by the total time n (years) of the project and the discount rate ( ). The net present value (NPV) of a project or investment is defined as the sum of the present values of the annual cash flows C, minus the initial investment Cq. 

In October 2008, the Sichuan Government announced various preferential loan policies for households to rebuild their house or buy a new house. For households taking out a bank loan to purchase a new house, the minimum interest rate was adjusted to 0.6 of the benchmark lending interest rate, and the minimum down payment was reduced to 10 %. And for rebuilding, buying or strengthening a house received a 1 % point discount on their interest rate. 

---