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Challenges in advanced management accounting
Challenges in advanced management accounting

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4.2.3 Risk and time delay

People sometimes think that if cash flows occur further into the future, they are riskier so should be discounted at a higher rate. This is incorrect: the discount rate is already applied and compounded each year, so cash flows further into the future are discounted at a higher rate in proportion to the amount of time you have to wait until they occur. If risk is constant over time (e.g. the same discount rate is applied for each additional year), then the discount rate already takes into account the increased risk with greater time into the future.