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Originally Posted by Fuzz
Sorry, not in finances so I didn't really grasp the discount rate.
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When they say it is a discounted rate, it is basically a present value calculation.
They intend to pay over 35 years. If they were to make a one time payment today that is equal to the total 35 year payment stream, how much is that worth in ‘today’s dollars’
There are 4 main pieces to calculating the present value
Payment amount, term, escalation, and internal rate of return
The amount of each payment and term are simple.
- We know it’s 35 years
- 1% is the escalation they are assuming. That is, they would be agreeing that the actual lease payment they make would increase 1% every year
- 5% is the internal rate of return. How much could they earn on that money each year if invested. It’s kind of like the return they expect and find acceptable on their investments. Every company has their own IRR they use when doing present value analysis
Comparing the 1.% to historical inflation is pretty favourable
5% seems pretty modest for an IRR.