Bumpy trends
The calculations which we have just met cannot be applied when the amounts of the inflows and outflows vary from period to period. However, there are two variations that can be used. They are known rather pompously as net present value and internal rate of return. Let me introduce them and then explain about the discount rate.
The practical application of net present value and the internal rate of return, and the choice between them is discussed in Chapter 21.
Net present value
The net present value of any future stream of income is essentially the amount of money that you would need to put in a bank deposit today at a given rate of interest to generate the identified cash flows. For example, if you project the pattern of spending ...
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