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In layman's term...Capital Value

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Dylangal Posted: Fri, Jul 18 2008 11:59 PM
I have Rothbard's Econ 101 lectures and I've lisened to it once, (but my iTunes, gives some funny error when I try to play it, and I can't find the CD right now) so could someone explain exact what it is? Thanks.
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Zlatko replied on Sat, Jul 19 2008 6:31 AM

The present value of future cash flows.

Say I have an apartment that I can rent out for $10 a year, and that by 5 years, it will be "used up" (a bit unrealistic, but bear with me)

So, the present value of the apartment should be $10 x 5 = $50, BUT, since people value $5 in the future less than $5 right now, the value will not be $50, but always less. How much less depends on the interest rate (the rents are discounted by dividing by the interest rate).

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fsk replied on Mon, Jul 21 2008 9:16 AM

I wrote an article on the discounted cashflow paradox.  The problem with discounted cashflow pricing is "What rate should I discount at?"

In the present, it's hard to accurately price capital, due to State distortions of the capital market and credit market.

For example, does it pay to borrow at 6% to buy an apartment building for renting.  If there's going to be an inflationary boom, then that's a profitable investment.  If the money supply crashes, you may find yourself unable to repay your mortgage.  When FRE and FNM play leverage tricks, they always qualify for a bailout.  As an individual, you won't have Ben Bernanke personally rushing to your aid when you default on your mortgage.

If you predict that we're at the start of a boom phase, then it pays to borrow and buy.  If we're at the start of a bust phase, then it pays to sell and deleverage.  You're not an insider, so you can't predict what's going to happen.  Plus, insiders *ALWAYS* qualify for a bailout when they bet wrong.

I have my own blog at FSK's Guide to Reality. Let me know if you like it.

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