52__exmonarion economies Seed en We io i nao oe he ma ice refeeno inthe mame iheoreaenrnnit or mre ng 5 Converting Exploration thing ich wer ou eta to tangles ssh a rendered tee Wa mean of deduction, over prod of yer, of the ve Programs to Cash Flows ‘fan expenditoe whi is not expensed. The amount amortized a (Ged) each sear ual bed on experione ‘Cash Flow Analy a pop of ar ene ingot an Previous chapers dealt withthe terms and consents needed to derstand investinent evaluation. This undertanding of methods 2nd ferms was necesny in onder to proceed with more complex methods “Most corporations have growth aan objective, Spectacular growth ean be achive Tor the ssl company, ether throogh meget ot fortuitous invesmens. As corporation gts ages it takes inresingl larger ew investments to insure growth, Thus every major corporation mst wisely ‘eines part of ks profs enable continied rowah, Theat of fret becomes a test ofthe shill im ealuting nn sling the ea tee investments fom he noch of pais Some companies te cata lime I xach uty she bet invest ar elecied tating atthe top, Investing continues it fonds uelel Fora company nt capital limite, a iferent approach apples. hs ‘aly, The minimum standard must besbove the cst of capi oinsare {zfowth: and a company’ eate of growth wil be determined byt ability {o make a satisfactory return on new insstment opportune, Reperée les ofthe financial sity of corporation, ib mportat to corse fnvenments on a cosmon bas. Tare investments in ighsk ventures require caefel and sound evaluation, Majer corporations bave the finasial aii fo make lage Inestent. The also ave, within rsson the capital tive oghe "ak ventures ifthe potential gai ate woth te sk SUSE nm The ception sh corse ee nsnayag54_expLonsrion economies “One ofthe Basie lol to evalmte and compare investment opportun vis cash Bow anayin This ehaper bulls the basi for converting ‘eploratony plays or programs ito cas low steams Ccashttow anayals Then rel of matching he inflow and otfow of| Sit relaed fue over theif of am investment, sash ow stream "Thecacustion of cas low tram frequent eletred tows Dulding sn esonomie mode Regards of he erminolog)s echague is oeded to dept cpenaiues for nvestmens and subsequent revenue geerated {Cas low analyst not ony relates nvestinnts to subsequent eens, ‘pur also enables a comprehendible comparison between investments “The fference bees inflows and outiows ove period of time a ‘upto profit or los Ths ierece i clled net ash ow. Note that we hve sid that the net cash flow ca be positive or negative. For mest imvesimens, ariciany those athe exploration department, the atl ual cash flows ate nepntive. They are agatveBeenseouiow (he ‘roncy to make the sovesient) exceeds iow (revenue) ‘Dnt can seca ow analyte for any entity which Ras Both income and expense. a corporation, indiidoa, government, vb, OF FEAR “The oa cash flow, posite or negating, for a corporation the sum of toe cashflows forall funtion In exploration economies we ook at he {lows forthe combined explorton production estient seam ‘We ry to analye all opportunities on a standard bass building o¥ the preceding chap, prope income tx calelatons are an important {aoe of eat low seas ‘Our consraston of «mathematica! mode! for exportion-progution investnets wil spate he ca wnt wo segments 190 doing the fst the invest can flow ster (alter Federal income tx) aa Secondly the income cas flow seam (agai, aller FIT) The sum of| the two sean wil be the aera et cash low oF the profit ast Mow steam, we mus break Ob expenditures ato sib aroupings {or tae purposes, The separations shown om the fllowing table which conning xperaion Propane ts Cash Flows 65 categorizes for tax veulment the expenditures associated with the Schoo! prospec. Yor Ga Taam eet [tration expense = $3000 Be - 0 1100 = Fist ets deal withthe exportion expenditaes. Ost separation slats tangible and intangible conte for el sopalzed exploration Costsan thre ems unichare expend, Wea follow the elope the Shoo romet hy looking sexpert cater in hic they are placed and the yar af ependoe a ‘Noe that he iat en en the numer eo, Yee sre onside ered i cash low an he pn ofthe ft gia pene ‘oct wh he ine bing mad, ne san Sa ah value, represen parts ealutions onl and shold be uderaken Sith the fl Bnowiege that ehey donot eft the ete ives Paria evasion are sometimes impropery snled “ecemen imvestmenis. An etportry invert nde to generate pot56 _exrLoRATION ECONOMICS “cially seis of investments coh rqubing a decison based onthe futeome of pir investments Production department expenitores amount to $32 milion, whih sith enploratory funds yield total out-of pocket expenditures of $62 Ilion, The eapiaized investment, howere, (what we show on the ‘Conporste booke as am ast) tours fo only $3.6 milion “The lnvestmenteath ow srw From thesepartionsmadein Table, Tninvotment ash ow canbe constructed. Remember, weareseparaing the investment and revenue aw seams nly for convenience ad ese of ‘xpluaton Oa lnvestnens low stream forthe School prospet shown to Tabi 1 In eat 20 of Table 12, am expenditure of $50.00 inated under the capital colunn. This number presets lease bonus ad the nt Dut for year er ie—SS00 (0, In ear one more leases are purchase, td seotycl work iscondustedon the pospet and some exploratory Chpemes at incueed oth aasing up to $200 000. eee Sa a i = Toa Fag cast #00 Ealeratan eget) ong cos (APT) = #98080 fxparaon epee ae oe Mette cst AF = 840080 own nection epee ous owen = 98400800 (sloaion & procurton expences) FIT = Faleral Insome Te Note th income tx credit column, It shows a+5100,00, Where dose this money come from? Remember our ate of 50% athe $200 00 of | expensed IDC rem In cashflow aul casayetmentscivea set {orth income tax saved spending the $200,000 weineuraredacion ‘come tax of $100,000 and the School prospect receives crest fr Phe mount It shows up then as aninflow under the ak eet column. Te procedure only has merits a company bas profits ror whch sch ‘ecaune ofthe ax credit the net outflow for yea two only $200.00. ‘We sent $0 (00 but saved $100,000 im ncore ax. The government dd not give ur SIOD 0, but we sved $100,000 in tans by vite of the 521000 in expensed costs Ip yea tothe $1,200.09 in the intangibles and expensed colar indiates two exploratory dry holes. but they generated a ta erect {slow ro thatthe net xo sols $6000, Year tree represents the lat year of exploration ivestment. The $2000) under the tangible column (an outflow) inicter the dicovery wel, The 5700000 of ianpibedriing esse Tobe 1) andthe 3100.00 expense generate together tax eres of $400,000 making the ret outflow for year three ‘The sm of the net sash outiw t0 tis point represents after-tax exploratory expenditures. They toa $19 millon. Compared to toa! exploratory expenditures of $30 slion. we asthe signiianee ofthe {ax credit toms) to nu investment seam. Fnging cons expres 2 dolar: per bol or eants per Met unslly express total expenditures, Seductions) tasable income and income ta inteaee sharp. A Tiguidating company always looks good on the socktolies report ‘because ofa high ern on book aes. Buttelack of new nvestments ‘means i living on Wortomed tne. One ses bere the matiation smo Aiserfed investments where a surpus cash flow exit ‘ears fou" and ive show the ouflows for production department expenditures, These oulows include the welt drilled t0 develop the Prorpect pur the necestry lease ite (ak bates, phen lines58__exrionarion Economies “Tox credits are sil taken for savings from expensed items mostly ansible ding costs The lier rodtion vestments ao 31.9 milion, compare to $32 milion total expenditure The sum of the dearly et investment out repetent for eas flow aa the ot Zier tae inesnent—for the Schoo! prospect total $38 milion, The 5258 milion poste ax credis of $24milion equal the ttalexpenlre [1862 milion Beause we have other pit rom wick we can edt fnly S38 rion, Agun the agntadeof the ak fds Mustrates the Stnijeant ference betucen Belore an alter a ivestens Belore ving the invert cat low team thet af Several pois to be enemphasied ‘tc, with he soome carb low steam. Iwas separated bere {or sarfeation purposes 2. Remember the sero year aF the Sear of the fst significant Expenditure fr she invetent opportamty. Oe can push the Sto year to any "downstea” investnent ft the comb tion fo nt eath flow ofthat part investment, Think ofthe evo year a4 point of decision 1. Un finding cove ate normally exprestd in total expenitre dota, not after tax 4, The aplalized expenditures of exploration must be separated from tangible investments (which are also captazed). Tax ea Colationspecesate the separation. Tangible costs associated with driling cst, ease facies, Now lines, te. wil be deprei- {hed over the Iie of the property. The capitalized lease Bones tf now productive lenses eaponsed when the lases ate cane fll or allowed to expire 5, Watch for investments socursing late inthe project fe (major ‘orkovers compresiion 1 boort pressures smelted Bus Ieeroira secondary recovery driling and equipment) 46, Ty to nce lel or nimated expencures sociated with snoportuniy, Re a relate as posse 1, Ifyou work fora majoroit organ company, «cera group til proboby supply uidelns for conte or factors dificult to {olete Ir not, you must etinate them on your own. Examples Conaring Elerion Programs to Cah ows 58 + enveonmentl or permiting delays ‘The Income cath lw steam Aer the suicssfuldkovery well and ‘obeequetsureell development wells go on production, both nfl 1 Gross revenue ffom the sale of ol a5. tural gat igus, or tulfr isthe basi inflow: Sometines there 4 stall amount of ronsdepetable income from gas plats not credited to he ese Suen simscan be ignored forexploration-produtionevaluations 2, Tax credits cunt as inflows, at exphined previously. Thee crott esu fom expensed ems 4. Net savage vale i ao # ype of iflow wally ignored in exploration evaluations unis the salagr vale ita igh per cent of the ovginal investment. Tanoring savage wil not ‘be entered inthe appropriate year ofthe cash low’ steam “The outflows reruing from a succersfl discovery are (Definitions for these terms are inthe preceding ceptor) 1. Theroyals Ii pido she farmer or mineral fe older. Usually ‘he mineral fee Holder receiver ne-cigth the value of all pro ‘eton, sometimes more. Roslin larger than one four ae rovaly (varying with producing rate) can be coupled with bonus60 exrtonamion Economies ‘the bd variable, The tase problem earned tvoughout is ‘ook will en! wath te move general xed royalty situation. The ‘ther two special isan slong with net profs bing wl ‘duossed in Chapter 1. Production and ad valorem tates, These outflows expenses are fate and loal tree, ‘Oveead above the leet of lease operations. Having ted the incon stream inflows ad outows an example can be psented.Anincome cash om eam forthe Shoo! prospect olOws in Table By seting vp column headings, one can easly ee the relationship tetween the lilo and oifloms ofthe income steam. From yar 20 ConringExseraon Protons to caen Flows 61 ‘well was only completed in year thre. Gross evens begns in yet four fi ast or 10 yeas, hough ear 13. ‘rom subtracting the royaky fom prose evens, Tanes, det operating ‘expense and overhead re deducted from ne reve to get the income ash low before Fedral income tax, column seven, We started with $23.0 tillon which nts to $167 millon belore deprvation, depletion and From thir calculation of income (BFIT), we can proced to the Aeterination of Federal income tax. Again she computations fall, ‘eat inc afew columns, as shown on Table 14 “come oe ea at Fa nae) lables Column sevenisepeated Fomincome( BFIT) surrendered ese, ‘epltion and depreciation are deducted to ative at taxable income — ‘colom ten (Surrendered leases were not inched inthe investrent ash Mow steam because they ate a norcash tem. Cash flow measures cash Bde Peete) Linsome Temes62__exrvonation economics bss) Ata Se ax ate the Federal income tax eprsents oneal fmt Income an is $77 millon. The Schl prospect doesnot pay $7.7 milion ‘lanes becsae ofthe tnt cred shown on Tble 12. Now ta get the income cat lo ream we merely subtract colin leven (Federal income to) from at income (BEIT) col seven. The Test san inane cash low seam ong 39 lion, Net eth fom Our cashflow anayis has proceeded from the ofow (tinvertment dolls through revenue andthe axe he generated. We have taken advantage ofan invesnen and have eximated it ture income from production sol. When we combine the two same, we ave the aot cash lw aller Federal income tx (AFIT. The combina: et cnn ow er earl come ‘etl ame| cow fern) hon soo Fae “The fst column our investment cash Now rom Tabi 12. Theincome ash ow steam is trom Table I. The combination is shown under the Ieaing of net eash low (AFIT). Our goal in th chapter has ben to ‘Our total net cath fw ie $3.2 milion. the diferenc betwee te ion tnd investment cath flow streams “Three important fs wil be ued from the cumltive cath flow shown Inthe steam, The maximum negative cashflow tore such fact Even ‘hough theater tax investment as 8 milion forthe Sod paper ‘we ate sever out that much money. The School prospect earts money ‘egining in the fourth year and at such we only have out pocket demands of $21 lion “The cumulative cash ow become positive inthe seventh yur. Thus between the sth and seventh yeaa the income equals the ate tax Snvestment anda payout achieves "The Ui an fal fact aed fom he st clu is the otal net cash ‘ow set Wisoftencalldthesctul value profit, Inthefallomngchape, 16. 5 CUMMATIE NET EagH FLOW (AFI‘On Fig. 5, these poins are dusated graphically, Nove again the smavimum negative cath low thet cumulative cash Now actual ale pro) andthe yea of payout, Accounting verve cath wt How does cashflow anlis depict an fnvestment ciferenty fom an acrounting concept? The fet fact to corporate net income (AFIT) isthe same a the otal et ath lw There fe difleences, however, and they Involve cing, The diferenes are Mosrated in Tab Te ecouning concep ch tow eng concept ied unt arene Dupes, averExp. ‘ate Fh “The upper half of Table 6st ona before a hai the accounting concep Althouph the investments mae in thes eaten fcoounting records only through deprecation (nthe $5:000 doe aot ner the ash lo stream bt edie at 1.00 per ear as thesevenue ‘ows info that investment) Not the norm income oe Booked pote thown over the fiver period. Compre thi iurration withthe cash Consring ExlrstonMopans Caen Rowe 65 flow concept Inthe cath low concept, the $5000 ivexmenteplaced in ‘he eh ow stream in year one it produces a nepaieincome of S300 ‘compared tothe postive $100 fiat year booked profi, Compare fequent sears Note the income difeences At the conclston of the Investment gear 3, the otal booked profit an the eek lw (BEIT) are ‘he sme. This sameness he important pont to remember ‘Summarising the reatonship on Table 6, ne note 1. The accounting procedure matcher booked outlays agsinst revenue ast s produced I ilustater the effect fan nvesient fon the overall corporate books It eutsrepor earning power tf the corporation to the stockholders, 2 The cashflow procedure matches outiows against ifows when the disbursements made orca recess, Ie primary ue ix 10 Ieasue annual and cumulative cashflow and fo provide a 4. In both procedures the tk concepts ate shown according to satatory requirements. Ax you will seein the ext few para raphe, the income tax generated by a suc investment i ftterd into each procedure inthe tame manner; and the tes To ilusteate further the comparison between cash low and accounting procedures. Table 17 war prepared” It males the compuron forthe ‘School prospect. The fret erence you mill noe the timing tested in the first column. It shows the ting of cash ouilays under Procedure we felted cash outlays to ime atthe income is produced Thus the cash ous to be reflected on the corporate books bein as revenue is produced and are reflected through deprecation sod ep: tion Column one i shown only fr ilstation purposes snd dors not enter the caleulaton of booked nt income, Note ta column fou oes ‘$3.00 000, he seme as cluran one “To caeulae booked et income, we bein withthe income e4sh flow stteam before Federal income tax, the same as col seven, Table 1 “The Fesera income tax in column fie includes investment aX reds which are preceded by a plus sign (Ch. These credits and expensed items afec! booked et income wnt te fourth year. inflows a easta in the fourth year and depreciation of the invent begins. Note fhat the deprecation (tals 8360.00, the ame as the captazed (booked) investment shown on Tabie ‘Aecoung cnet ct ows “iol pone In column five he FIT of 8.3 elon the algebraic sam of e517 milion and the 824 milion in tax exe, Table 2. Column sx, booked et income, escuatedbysebtratingcolum .4and fremcolmn? ‘The income eash flow leer expensed Hens, depreciation aed Federal Income tax equa booked net isame oe corporate pra ATE. fn ttal (55.2 milion) tithe ame ae tbe net cash low FTE The year diferene results fomtbedfeenc aiming of dedstions caused by depreciation {Columns 6 and 7 alow direct commparizon between booked at income "Aa ilustraton of the acounting concept versus net cash oy is shown on Fig, 6. The total cumultive cath flow ie the sine Conaning Exons ogra ta Cath Flons_ 67 {oral corporate profit. The corporate books, however, show a mach fren plot on cumulative profit: eg, the maximum negative prot is only $700,000 compared to = maximum negative sath flow of ~s1. 100.00, E ed) bat “The comparison on Fig. 6illustats how acounting records reflec the return of ash versus cashflow als. The deren snot sorpriing, howeer, when the purpose ofeach = understood. The corporate books felt the exingushing ofan iovestment coinefen with ie prodiced ‘evnue-Aecounting principles nal indies rath depreciation othe revenues produced by he depreciating inves, ‘Cash low analy focuses on the avulable cath (r Ick of )enused by a specific imvesment I san evaluative tool The seventh chapter Ws fasate this concept. 1s enough at this point know that cath Now anaiss St wtf tol for asecting the best svesients when there ae many vestments fom which to choose, ‘Booked return on investments ‘The ate eetura.on backed nt atte ie {common financial farasock. ee not often sed i investment eva ‘on In certain stances, however, desirable, parculay In a maior favestment to know the effect onthe corporate return on a invest‘ment opportunity. Table 18 sseates the caution of this yardstick forthe Shoo! prospect. "Scan pease ferboot re ag.ot endo Average nt Test aepisn “your” ‘Sar’ yen? Icons “The annual ate fret on booked investment scaled by rating yearly booked set come (corporate prof) to the average booked invesmen. The average sssunet cll by ding By to the Sim ofthe beginning ivesient andthe investment booked at he end fof the year Changes uring the year—aditions t investmest and precio of ening Investment~ate feted i he end of the eat ‘When tad or ovestnent evasion the yards sought isthe return over theif ofthe invesnent, Its cles a Follows Comultive booked nt income % 100 Booked ate of return = Sor of average anal booked ivesimens x 100 = 924%) Comaring Elation Progra a Cath lows _ 89 Copier Sone the hey bung lek in he eis. Having iets te 2. Cann fow anair ia meted of matehg inflows a tows. he fst Speier cine emsnnotetengoncometatlws 4. Tempra ara dead omc70_cxrvonarion sconomics [REQUIRED INVESTMENT? hem (Gin tree ‘eoonsia wo 5 t : (0% cain tiie etl On eu) 0 2 (7 ni) ae (orien Dry tae eer 5 {ives toe eet ogo hes coningExpoatonPrenans to cash Flows 7 SUCCESSFUL PROSPECT NET CASH FLOW Yew invert icome ow “nero ‘ow Maxim eptve cash ow year —_ Cimitvecsk Row becomes positive daring ear —— ‘Atul ale pote SMRete 2 6 Tomorrow's Dollars Today (Present Value Concepts) ‘The concept of present valve tone ofthe most valuable 1008 in investment evalaton, Dut definitely not the aly too. 11 not cure bur must be sed with a thorough understanding of ts advantages and ‘other economic concepts for meaning comparison of invetment ‘portunities. "You have heard the terms “acounied cash flow.” rate of return.” and"present value profit" yu haven previously been exposed 1 the bic prince of pretent sl, thee terme may teem shrouded bY a ura of mystery However, there i othing new, aga or mysterious thou! present value economics ln fact the prncpes we sal aces fave been ated by bankers and insurance men sine “deli in dolars™| became a business. So, efor we tlk about present value principles, pple o theo indy, ler tales Bit about the money business (rimvested funds to carn interest mes the money business profiable ‘ne, The enact amount ef interest earned i function of two tN 1 The interest rate (ie, 8. 65, 8, 6) 2. The frequency of compounding (i.e, aanualy, quarters dls, ee) ”“Throughout this chapter, for simpliciy’s sake, we will be aking ‘only about interest compounded annually. Although more fequcnt compounding docs make a dfeeace, it doce not significa afeet, ‘sploratory investment analysis. See Append C for some comments fon compounding a aster than annual rates, Future vate of vested dolars Lets no look a how interest ass to Increase the value of money ever «petal of time. Suppose we have a dolar to invert, furthermore we Know where it ean be invested at 10% fompounded annvaly. We wil inven our dollar now ted call the pot In time—"year zero." Afer one year (eat ove) our money is worth (8100) + (0.10) SL.) = SLO Equation ‘Our dolla has cared 10cets during fsa fimvesiment. Wecan state Equation I nother way by factring out he (SOD) Ieshen becomes (6100) + 010) = $1.10 Equation? the second year we een intrest on our original investment of 81.00 and aso om he SOD interest earned in eat one At the end of 80 (1.10) + (040) (S110) = $1.21 or etted Equation 3 (SL10) +010) = (Lao# = star Equation ¢ In tke manner, if ovr dose remains insted fr 10 years at 10% Ierest compounded aan, we would have $2.59 or 259 times oor The tes jest enumerated are shown in Table 19, Several pertinent fact come fron Table 9. 1. During the seventh year, our original investment doube. 2. The equation for compounding out investment utilizes the From the isrtion, we ean show how the growth fan invetnent at Mi = ieret ete 1 = number of year at eters i compounded annually 1 =the tvestment, TemnorowsOale Yodty 75 LUovesmen) (1+ of rueenn t+ Equation 5 [equation Scan be se calculate te future ate of a investment of soy see Problem 1a he end of thechapter wl est your understanding “Te present value of fre diana Lets look a the money business {rom another ang. Suppose we donk want Yo invest a whole dolar a {ob some amount less, We want our money to grow, through nter= ‘st to be worth one dollar atte end of one yet. We ask ourves& Ailernt question. How muck must we invest now to have one dollar ‘Toe number weerelooking for ur investments the equation become: 1x (410) = S100 1.0 S12 50.909 Equation 6 vt 09 re)Egution el wr—ifweinvet 909 for one yeaa 10% we wil havea sor a yearend. Stating his thought anoter wa)—todays value of mest Jest dol (10 5099" A dalla of come rected nest ear SI coca ‘orm only 903 tay tec ote lo ne years ner 156 EE Teste comer thestne rom. on Row want ou npr, SE eon om on ee oe to gow ta dolar in two Jer - - 1d 010) 010) 100 : nee Mugen) = tan : 32 5 1210s ons gestion 7 : ie gunton 7 tel hat i weca ean 10 compounded only, we : seat only invent $0526 tae one dle pars z inion! aa the tadoy ae offre dolar cle the 2 & pect wale and Euan 7 oul writen 3 = 1.0 36 7 ome fe ce eee asi 3 == feo yar 206, Agee soncep con be sine by 2 i zs tartbace ens 0% t 33 3 (0) s =78_exronstion gconownes ‘An equation also express the presen value concept. develop in ‘say mir to Equation 5, Using the 10d yeas arisen The presen value of 1, acount at 10% for sean = Gao = 5s = 0386 fh = numberof years dicount at rate en Protas uation § “The message from Table 20 8 you can invest your money today at any imeret rate then tomorrows dlrs are worth es than 4d lar today The able shows the scout factor for the 1% dicount ae Note ow eapidly the value of fare dla diminishes By the 0th year they are worth (oday) only $0386 Note alsin year ete Table 2, she 1.00 figure. This ruber symbole he fact tht dla in the pocket today is worth one dellanat more oe, (On Table 2 the discount factors ate show for eleven eileen ds count rats, ranging fom one fo Sf. You wil ecoprize the ist fe factors shown under the 105 discount ate Steps to enable orto compretend discounting Ove of he Step then ia 1. fm aking an investment wear, in effec, purchasing series, of arma ature inom These Iwo assumptions ate important. Through eemesiment any Income eeived eal hat more value than ae incon I the count it id 0B the nee ate hat an be ad sou eines Early inthe life of an investment (emember the School prospect, te annual cath flows ate most often negate. In dicoundng cash flow seam, the epative value ae dtcauted alto. Why? Because we some that uni fvestment funds are required that money ic invest Perhaps by now yOu are catching a pimps ofthe importance ofthe dscount rate and the timing of investment. We are about to cay the concept of te ie vale of money, Let re-examine Table 21. We wll take few sumbers om his able and contracts new oe io state the senfcane of various sacount rates ine tence (andacoomes) 3H —~C«ORSSCSC ‘comparison of preent value i made forthe nero year and yeas 5, to, and 20. Note the uedacountd valu. I wil oncefore be ele he hu vale In Table 2 aay 1.00 and always 1.000 fray flacount rate Inthe zero eae. ‘Check the 0-year line. At money tn years Renee is worth only (614 per detiar Compare the 205 ate In the 10th year a dol is ‘nly worth $0 162i you coud ave invested fe at 20% fn the 200 eat 12 20% discount rae, dalle Rasa value of only $0026. “The lft of dncounting ir shown grapically on Fig 7, Notefirs how fast the dicount factor decreses 3 big rates, sich a8 3%, To compare theif of various rates on acashflow stream tat atthe fof Fig 70m theo {discount factor line, (Think ofthis factor ar adolar worth 10 cen) Moving tothe ight heck the fotrestion with each discount rate curve [Av Sie y the sith yar income lows discounted below 10 cet. 130% the 10 cont line ie esched a9 years, at 20% 013 Years. These curves ‘monstateam important fact. Any event beyond the 10th ear ina cash ow scam (now or outflow ha itl eflect on preseat value pri at fats higher than 20% Even a 10% dicount rae, the igatieance of Investments or revenues sharp reduced beyond 10 years