Discounting the Future

Discounting the future occurs when an immediate benefit is systemically valued more highly than a delayed benefit. As with other discounted cash flow projections, the variables are the size of the estimated cash flow, the number of discounted periods in the future, and a relevant discount or interest rate. In a case involving one cash payment or outflow (PV) and one future payment or inflow (FV) at a relevant discount rate (r) for a number of discount periods (n), the present value (PV) can be expressed as

A classic example is an amount of cash placed in a savings account (PV) to be redeemed on a future date (FV). All other things being equal, the present value of a cash flow decreases with a decrease in ...