What impact does a higher discount rate have on present value?

A higher discount rate decreases present value because it reflects a greater required return on investment due to the risks associated with the projected cash flows. The discount rate is used in financial models to convert future cash flows into their present value, effectively representing the time value of money. When the discount rate is increased, the future cash flows are discounted more heavily, making them worth less in today's terms. This is a fundamental principle in finance, as higher rates indicate increased risk or opportunity cost, leading to a lower present value of future cash flows. In other words, as the discount rate rises, the present value of cash flows diminishes, illustrating that investors would require a higher return to compensate for higher perceived risk.