Question

Explain intuitively why it is that present values decrease as the discount rate increases.

Answer 1

Present value is the today's worth of a future amount.

Discount rate is the rate used to discount future value to present value,

Discount rate is the required return or the rate which is used to calculated present value. Present value = Future Value/(1+Discount rate)^n

Hence, whenever discount rate increases, the future value is discounted at a higher rate, which leads to a lower present value.

When discount rate is higher, it means return per year is higher, lower amount today is required to reach the same amount of future value.

Hence, present value decreases as the discount rate increases