Accounting for the effect of changes in the discount rate

A provision is required to be set up for an expected cash outflow of €100,000 (estimated at current prices), payable in three years’ time. The appropriate nominal discount rate is 7.5%, and inflation is estimated at 5%. At future prices the cash outflow will be €115,762 (€100,000 × 1.053). The net present value of €115,762, discounted at 7.5%, is €93,184 (€115,762 × 1 ÷ (1.075)3).

At the end of Year 2, all assumptions remain valid, except it is determined that a current market assessment of the time value of money and the risks specific to the liability would require a decrease in the discount rate to 6.5%. Accordingly, at the end of Year 2, the revised net present value of €115,762, discounted at 6.5%, is €108,697 (€115,762 ÷ 1.065).

The movement in the provision would be reflected as follows:

Undiscounted
cash flows

Provision

Year 0

115,762

93,184

Unwinding of discount (€93,184 x 0.075)

6,989

Revision to estimate

Year 1

115,762

100,173

Unwinding of discount (€100,173 x 0.075)

7,513

115,762

107,686

Revision to estimate (€108,697 – €107,686)

1,011

Year 2

115,762

108,697

Unwinding of discount (€108,697 x 0.065)

7,065

Revision to estimate

Ycar 3

115,762

115,762

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Benefits of our college essay writing service

  • 80+ disciplines

    Buy an essay in any subject you find difficult—we’ll have a specialist in it ready

  • 4-hour deadlines

    Ask for help with your most urgent short tasks—we can complete them in 4 hours!

  • Free revision

    Get your paper revised for free if it doesn’t meet your instructions.

  • 24/7 support

    Contact us anytime if you need help with your essay

  • Custom formatting

    APA, MLA, Chicago—we can use any formatting style you need.

  • Plagiarism check

    Get a paper that’s fully original and checked for plagiarism

What the numbers say?

  • 527
    writers active
  • 9.5 out of 10
    current average quality score
  • 98.40%
    of orders delivered on time
error: