ValuationBeginner7 min
Future Money Is Compared With Today's Alternatives
Someone promises you €110 in one year. What is that worth today?
Why this matters for beginners
Future money is discounted to today. This is general education, not personal advice.
Main explanation
If you require a 5 percent return: €110 ÷ 1.05 = €104.76 today.
If you require 10 percent: €110 ÷ 1.10 = €100 today.
When safe rates rise, investors want higher returns from riskier assets, so future profits are worth less today.
Companies whose profits lie far in the future are usually more sensitive to this effect, which can compress valuation multiples.
Example using a real company
The same €110 promise is worth €104.76 at 5 percent but €100 at 10 percent.
- →Lower required return: higher value today.
- →Higher required return: lower value today.
Common beginner mistakes
- ✕Treating future money as equal to money today.
- ✕Ignoring why distant profits react more to rates.
Key terms
- Present value
- What future money is worth today.
- Required return
- The return investors demand for waiting and risk.
Key takeaways
- 01Future money is discounted to today.
- 02Higher rates lower present value.
- 03Distant profits are more sensitive.
Check yourself
- 01€110 in one year at 5 percent: value today?
- 02€110 in one year at 10 percent: value today?
- 03When rates rise, what happens to present value?
- 04Which is more rate-sensitive: profits soon or profits far away?
Apply this in the Analyzer
Try the concept on a real company
Open a company in the Analyzer and ask which of these mechanics could explain its recent price moves.
Educational examples only. Not buy or sell recommendations.
i
Education only. TradeSensei does not provide personal financial advice or buy/sell recommendations. Examples and company studies are for learning, never instructions to buy or sell. Always do your own research.