00:01
So here we're going to do some discounting.
00:02
And let's think about the cash flow that we have.
00:05
So the first year, we get 80 ,000.
00:08
Now, the next year, we get 80 ,000.
00:14
But the rate of growth is 5%.
00:19
So next year, we're going to get 80 ,000 times an extra 5%.
00:24
The next year, we're going to get 80 ,000.
00:27
And then we're going to have them multiply that by 5 % twice, because it gets multiplied by 5 % and then that gets multiplied by 5 % again.
00:35
So this thing is going to grow at 5 % forever.
00:38
But the key thing is now we are going to discount it, right? you're going to discount it by saying that money in the future is worth 10 % less, right? so it is getting divided by 1 .1, right? money in the future is 10 % less.
00:54
This is what we call the discount rate.
00:56
And you'll notice that i'm dividing the first year by the discount rate.
01:01
Because the money is paid at the end of year, right? this is the key statement here.
01:08
It means that we're not getting the first payment until a year from now in the future, right? so that means the first 80 ,000 doesn't come for a full year, which means that the money that we're gonna receive does get discounted the first year.
01:22
Now the money in the second year gets discounted twice.
01:25
So we have to divide that by 1 .1 again, which gives us 1 .1 squared on the bottom.
01:31
Now money two years from now or three years from now is worth three times less, right? because it has worth again another 10 % less...