Just wondering how you would calculate a discount factor when the investment horizon is infinite, i was told that there was a simple way of calculating it,any suggestions?
Thanks
Just wondering how you would calculate a discount factor when the investment horizon is infinite, i was told that there was a simple way of calculating it,any suggestions?
Thanks
Tags: investment horizon
This entry was posted on March 29, 2010, 3:22 pm and is filed under Discount Blog. You can follow any responses to this entry through RSS 2.0. Both comments and pings are currently closed.
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#1 by Mathsorcerer on March 29, 2010 - 3:22 pm
Let v = discount factor. For the first year, there is no discount so it equals 1. For the second year, the discount would be v. For the third year, v^2, and so on and so forth.
true discount factor = 1 + v + v^2 + v^3 + v^4 + ….
which is a geometric sum = 1/(1-v) for v < 1.
If v = 5%, then 1/(1-v) = 1/.95 = 1.0526315789…. = 5.26% for the true discount factor.