Help me understand if a formula solves for anything or if its nothing at all ?

[tyza]

So, when doing a discounted cash flow, I know the formula to use is:

PV = CF / (1 + r)^t

So, the PV of $1,000 in 2 years' time using a discount rate of 5% = $907.

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Say I use a different formula:

X = CF * (1 - r)^t
X = $1000 * (1 - 5%)^2
= $903

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This is could be a really silly question, but I'm trying to understand the difference between these two formulae. Or, I guess, does the second formula actually exist to solve for anything?

 

[BigBeachBanana]

So, when doing a discounted cash flow, I know the formula to use is:

PV = CF / (1 + r)^t

So, the PV of $1,000 in 2 years' time using a discount rate of 5% = $907.

---

Say I use a different formula:

X = CF * (1 - r)^t
X = $1000 * (1 - 5%)^2
= $903

---

This is could be a really silly question, but I'm trying to understand the difference between these two formulae. Or, I guess, does the second formula actually exist to solve for anything?

The second formula says you have a negative interest rate of 5%, which means that if you leave money in the bank over 2 years, you'd lose $97.
They're not common but certain countries employ them to incentivize loaning and spending, rather than saving and hoarding.

 

[tyza]

The second formula says you have a negative interest rate of 5%, which means that if you leave money in the bank over 2 years, you'd lose $97.
They're not common but certain countries employ them to incentivize loaning and spending, rather than saving and hoarding.

Thank you - makes sense!