Discount Cash Flows Without Losing Timing

Projected claim payments are $4M in one year, $3M in two years, and $3M in three years. Discount rate is 5% per year. Calculate present value and name the timing sensitivity. Present value discounts each cash flow at its own timing: payment / (1 + rate)^time. The shortcut is to discount the full $10M as if every dollar pays in one year. Year 1 payment $4M / 1.05 = $3.81M. Near-term payments are discounted less because there is less time value. Year 2 payment $3M / 1.05^2 = $2.72M. The exponent is the payment timing. That is why a payment…

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