3 ms·

It may be "free money" as you frame it. But a cash stream that provides n dollars per year forever can be valued in today's dollars, assuming a discount rate o

It may be "free money" as you frame it. But a cash stream that provides n dollars per year forever can be valued in today's dollars, assuming a discount rate of d, at n / (1-d). So it's reasonable to prefer cash now to revenue forever, at that exchange rate, depending on your corporate interests. https://www.investopedia.com/terms/p/present-value-annuity.asp https://www.investopedia.com/terms/p/present-value-annuity.a...

Denvercoder9 3y ago
You have the right idea, but you got the formula wrong. That's evidenced in the source you link, but you can also reason it from first principles: a higher discount rate should make the cash stream less valuable, not more. The correct formula is n / d.
- Stasis5001 3y ago
  Oops, that's what I get for mathing before coffee-- mixed up the formula for \sum (1+r)^n vs. \sum r^n
rf15 3y ago
This strikes me as a shortsighted, risky, and frankly unsustainable attitude for a company. It's no surprise they're struggling.
- captaincrisp 3y ago
  The discount rate is doing a lot of work here. There is a discount rate such that we're not talking about shortsightedness. Getting it right is difficult. But as an example, how much would you buy an investment that pays a hundred dollars, guaranteed, next year for? Trivially, the discount rate includes at least the expected amount of inflation; it's not worth a dollar. For assets line like IP you have to factor in how risky the returns are, how much investment you'd have to make to see them (e.g. making a movie), and overall strategy (do we want to be in that line of business). All this to say - if you have IP that pays 10 million a year, you can value future returns on that IP in today's dollars. If someone offers you more than that to buy it, you should take the deal; you come out ahead.

3 ms·

It may be "free money" as you frame it. But a cash stream that provides n dollars per year forever can be valued in today's dollars, assuming a discount rate o

by Stasis5001 3y ago

Denvercoder9 3y ago
You have the right idea, but you got the formula wrong. That's evidenced in the source you link, but you can also reason it from first principles: a higher discount rate should make the cash stream less valuable, not more. The correct formula is n / d.
- Stasis5001 3y ago
  Oops, that's what I get for mathing before coffee-- mixed up the formula for \sum (1+r)^n vs. \sum r^n
rf15 3y ago
This strikes me as a shortsighted, risky, and frankly unsustainable attitude for a company. It's no surprise they're struggling.
- captaincrisp 3y ago
  The discount rate is doing a lot of work here. There is a discount rate such that we're not talking about shortsightedness. Getting it right is difficult. But as an example, how much would you buy an investment that pays a hundred dollars, guaranteed, next year for? Trivially, the discount rate includes at least the expected amount of inflation; it's not worth a dollar. For assets line like IP you have to factor in how risky the returns are, how much investment you'd have to make to see them (e.g. making a movie), and overall strategy (do we want to be in that line of business). All this to say - if you have IP that pays 10 million a year, you can value future returns on that IP in today's dollars. If someone offers you more than that to buy it, you should take the deal; you come out ahead.