What effect does a higher discount rate have on present value calculations?

A higher discount rate decreases the present value of future cash flows. This is because the present value calculation discounts future amounts to account for the opportunity cost of capital, risk, and inflation over time. When the discount rate increases, it suggests that future cash flows are less valuable in today's terms since they are being discounted more heavily.

For example, if you are expecting to receive $100 one year from now and the discount rate increases, the present value of that $100 decreases because you are applying a higher rate to determine how much it is worth today. Essentially, higher discount rates reduce the attractiveness of future cash flows, leading to a lower present value. This concept is fundamental in finance, particularly in capital budgeting and investment analysis, where assessing the value of future cash flows is crucial for decision-making.