Discounted Cash Flow

A flow of money over a time period in which each period's cash is adjusted by an appropriate discount factor to represent its (reduced) future value (fundamentally due to time preference). The present value of the flow is the sum of these discounted values over the period in question. See Discounting.

100 Discounting Discounting

A procedure for reducing costs or benefits occurring at different dates to a common measure by use of an appropriate discount rate. Thus, with an annual discount rate r (expressed as a decimal fraction) the present value (PV) of a cost (C) in one year's time is PV = C/(l + r). In two years' time, it is PV = C/(1 = r)2. The PV of a stream of future costs is the sum of every year's PV. For a stream, C, that is constant, the discrete time formula is PV

= C- . Of course, the same procedure applies to benefits as to

costs. There is controversy as to whether benefits (for example, future quality-adjusted life-years gained) ought to be discounted.

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