I have a question about the present discounted value of some amount of money, and how that info is used to make decisions.
Consider getting $1000 for 3 years when the annual interest rate is 10%. You get $1000 today, a year from now, and two years from now. The present discounted value of that is $1000 + 909.09 + 826.45. The total is clearly less than getting $3000 today. Why would someone value it at less than $3000 based on the interest rate today? I get that if you put 909.09 in the bank and let it sit for a year you would have $1000. If you put 826.45 in the bank today and let it sit for two years you would end up with $1000. Why would you value $3000 at less than $3000? Why are you valuing money as if you had it and would put it into a bank account to see how much interest you would make on it?
I have the same question about business profits. Let's say that you get $1 million per year from your business (ignore costs, risk, inflation etc.). The value of those gains can be discounted when you consider an interest rate of 10%. Using the formula for perpetuities you get PV = 10,000,000. So from now until forever you value the profits at 10 million bucks today. This makes ZERO sense to me: 1 million dollars forever equals 10 million? What's the most confusing is that people use this to make decisions.
What person in their right mind says "oh, I'm going to get $1 million forever from a business, and the interest rate is 10%, so I'll get 10 million". To me, if you get 1 million every year, you get more than $10 million because you put that money in the bank and get interest on it. So as soon as you get that first million you put it in the bank and get the interest on it. Could someone please explain it to me intuitively? I get that someone might not value money tomorrow as much as money today because of uncertainty and impatience that goes along with waiting. But this interest rate stuff is so confusing! Why do you use the interest rate to see how much you value something in the present?