Question

Fill in the following table from Appendix B. Does a high discount rate have a greater or lesser effect on long-term inflows compared to recent ones?

Discount Rate

Years 5% 20%

1 ............. ...............

10 ............. ...............

20 .............. ..............

Short answer

High discount rate i.e 20% have a higher effect on long term inflows i.e., 20 years. The Present value factor for 20% rate for 20 years is 0.026.

Step-by-step solution

Effect of the discount rate-

A lower discount rate prompts to a higher present value. As this suggests, money in the future will be worth less than it is today when the discount rate is higher.

Determining discount rate-

Discount rate
Year	5%	20%
1	0.952	0.833
10	0.614	0.162
20	0.377	0.026