Now, if money didn't have a time value, that is, if we didn't have to account for

the impact of risks, opportunity costs and expected inflation,

then there wouldn't be a difference between nominal and present values.

And the present value of the cash flow would be it's nominal value of $800,000.

As the time value of money becomes more important, as risk opportunity cost or

expected inflation increase, the discount rate increases and

the present value of the expected feature cash flow declines.

So in this example, we can see that a discount rate of 10% per annum,

the present value of $800,000 expected in a years time is equal to, well $727,273.

If a discount rate was higher, G2 for example, the cash flow being riskier,

well the present value of the $800,00 expected cash flow would be even lower.

So for example, given a discount rate of 20% per annum,

rather than only 10%, the present value of that cash flow

is only $666,667, rather than $727,273.

So as you can see, we have this inverse relationship between discount rates and

present values, as indicated by this downward sloping curve.