Economics Time Value Of Money Questions Medium
The discounting period refers to the length of time between the present and future cash flows. It is a crucial factor in determining the present value of future cash flows. The present value is calculated by discounting the future cash flows back to the present using a discount rate.
The discount rate represents the opportunity cost of investing the money elsewhere or the rate of return required by an investor. The longer the discounting period, the greater the impact on the present value of future cash flows.
When the discounting period is longer, the present value of future cash flows decreases. This is because the longer the time period, the more uncertainty and risk associated with receiving the cash flows in the future. Additionally, the opportunity cost of investing the money elsewhere for a longer period increases.
Conversely, when the discounting period is shorter, the present value of future cash flows increases. This is because there is less uncertainty and risk associated with receiving the cash flows in the near future. The opportunity cost of investing the money elsewhere for a shorter period is lower.
In summary, the discounting period has an inverse relationship with the present value of future cash flows. The longer the discounting period, the lower the present value, and the shorter the discounting period, the higher the present value.