Present Value of Simple Cash Flow =-—


CFt = Cash Flow at the end of time period t r = Discount Rate

Other things remaining equal, the present value of a cash flow will decrease as the discount rate increases and continue to decrease the further into the future the cash flow occurs.

To illustrate this concept, assume that you own are currently leasing your office space, and expect to make a lump sum payment to the owner of the real estate of $500,000 ten years from now. Assume that an appropriate discount rate for this cash flow is 10%. The present value of this cash flow can then be estimated -

This present value is a decreasing function of the discount rate, as illustrated in Figure 4.

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