Why Do You Discount Cash Flows

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Problem

Why do you discount cash flows?

Asked in the First Round (2v1 Interview) stage. This was a follow-up question on cash flow discounting mechanics. Explain the time value of money, opportunity cost, and risk adjustment, then use the generic mechanics illustration below to demonstrate the point.

Input	Illustration
Future cash flow	$100
Discount rate	10%
Receipt date	1 year

Explain why $100 received later is worth less today.
Calculate its present value.
Explain how the answer changes when the discount rate or timing changes.

Assume annual compounding and use the discount rate as the relevant opportunity cost of capital.