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PaperclipPerfector  5mo ago (text post)   4077 thread views

Small-Scale Question Sunday for November 5, 2023

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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Anyone who votes no:

  1. Doesn't know the value of 10M USD with 7 years of compounding. Hell, I'd take a bit of molesting myself for that much money at the age of 21. Forget consexual sex.
  2. Isn't aware that losing one's virginity at ages 15-16 is not that uncommon.
  3. Shouldn't be allowed to vote.

Doesn't know the value of 10M USD with 7 years of compounding.

The value of $10M with 7 years of compounding (accessible in 7 years) is exactly $10M, as measured by Net Present Value. Actually it's probably a hair lower, as the beneficiaries likely have a different discount rate than the investment.

I don't get it. Why wouldn't it be worth more after having compounding interest for 7 years?

I'd like to offer you a trade: You give me $20 now, and I'll give you $21 in 1000 years. $21 > $20, so surely my half of the deal is worth more.

The value of $10m invested for any amount of time starting now is (by the linked definition) $10m. If you could guarantee 10% returns, then $10 million today = $11 million next year = $12.1 million in two years = $19.49m in 7 years, etc.

I still don't get it. We're talking about concrete value of money invested, and what it is now, vs what it will be in 7 years. You seem to be talking about some sort of philosophical experiment about what money might hypothetically be worth if we accept certain premises, or something.

I was initially as perplexed as you were, but it seems the crux is present value, which in this case is precisely the amount handed to you today.

But @ulyssessword said:

The value of $10M with 7 years of compounding (accessible in 7 years) is exactly $10M

It seems like either he's saying that after 7 years of $10M collecting compounding interest it's worth $10M for some reason, which is wrong, or he's saying that he doesn't believe in calculating value of predictable future values of money, which seems like an esoteric argument for philosophical purposes, without real-world application. Maybe that 2nd argument is the present value argument, but I still don't get it, or don't understand why it's a useful argument at all, unfortunately :(

Are you sure you are not confusing the Future Value with the Present Value? The present value of $x today, is x. It's future value is the present value compounded over the hold period.

The discount rate you should use to convert between the two should probably be your expected rate of return. If you really want to get into it, it's possible that the expected rate of return and your personal discount rate are different. If you believe even in a very weak form of the Capital Asset Pricing Model though, you should still discount that excess return back to the risk-free rate, because the difference should explained by the difference in risk (Lots of details about the Capital Market Line omitted). Or, put another way, all assets have the same effective discount rate to a risk-neutral measure. The conversion should not depend on the assets you plan to hold over the period.

I'm not sure. Why did @ulyssessword bring up net present value into a conversation to contradict @f3zinker talking about the future value of what $10M would be worth in 7 years?

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