10.2.3-Discount rate and present value concept
A given monetary unit (for instances, a pound or a dollar) is more worthy in the present than in the future. By other words, the future value of the monetary flux that has a present value of one unit will be great than one. At the same time, the present value of a future unitary monetary flux will be lesser than one.
Through the years, this situation generates different “appetencies” to transfer money from the present to the future and vice-verse. Theses “appetencies” can be expressed in terms of different discount rates, r. The values of these rates depend, among other factors, on the state of the economy, on the risk that involves the investment, the capital availability and on the expected future rate
of inflation.