There are many indicators used in determining a company's net worth. These same indicators are used if a company's future earning is ever in question. Discount rates are used to fill the void of such future earnings that may have been lost by circumstances out of the company's control.
The Discount rate reflects the rate of the payee rather than the one being paid. The strength of the company determines the size of the discount rate. If you have a weak company one can expect a high discount rate. In the case of the two companies chosen for this paper, one has an established line with a growing following and predictable plans for future growth. While the other is a start up that seemingly has neither collateral nor a solid base from which to work.
Salvador's is a manufacturer of authentic Hispanic foods. Their products are positioned at the high end of the market in terms of both quality and price.
NPV vs discount rate comparison for two mutually e...
English: Internal rate of return Svenska: Internr...
English: Discount rate set by Central Bank of Russ...They have been in business for three years and have grown in popularity. Within the next three years, they plan on increasing sales by two million dollars. Salvador's also would like gross margins to be above 55%; while hoping to have 40 different outlets that will distribute their products. The Hispanic community was initially targeted because of its exciting growth rate. The market has indicated that their products have broader appeal and Salvador's has recognized this and acted accordingly. The community has been growing at 22% a year, almost double the average of the overall US population. Salvador's Hispanic food is a solid company. It can be said with confidence that, Salvador's will remain in business and making a predictable profit for the balance of their business life. In their case, the rate...