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Featured entry: Discounted cashflow

How much less is a sum of MONEY due in the future worth today? The answer is found by ­discounting the future cashflow, using an INTEREST RATE that reflects the fact that money in future is worth less than money now, because money now could be invested and earn INTEREST, whereas future money cannot. FIRMS use discounted cashflow to judge whether an INVESTMENT project is worthwhile. The interest rate is a means of reflecting the OPPORTUNITY COST of tying up money in the investment project. To test whether an investment makes economic sense the INCOME must be discounted so that it can be measured against the costs. If the present value of the benefits exceeds the costs, the investment is a good one.

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Essential Economics

The Economics A-Z is adapted from "Essential Economics", by Matthew Bishop (interviewed here), published by Profile Books.


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