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Present value

What a future sum is worth today once discounted for the time and risk involved in waiting for it.

The arithmetic is a future amount divided by one plus the discount-rate, raised to the number of years. At an 8% rate, a dollar arriving in ten years is worth 46 cents today, and one arriving in thirty years is worth 10 cents.

That decay is why growth far in the future contributes less to value than intuition suggests, and why high discount-rate environments hit long-duration growth companies hardest. The same cash flows simply become worth less.

Example: Northwind Tools expects $108M of unlevered free cash flow in year five. Discounted at 8.1%, its present value is $73M. The same $108M in year fifteen would be worth $34M today.

Related: discount-rate, discounted-cash-flow, terminal-value, perpetuity-growth-rate, wacc

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