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The
financial
concepts--the
time
value
of
money
and
risk--are
two
of
the
major
concepts
that
determine
the
cost
of
capital.
The
first
concept
states
that
a
dollar
is
worth
more
now
than
a
dollar
in
the
future,
even
after
making
adjustments
for
inflation.
For
example,
if
you
have
an
asset
that
will
give
you
$1,000
in
three
years
and
you
sell
that
asset
for
$900
today
rather
than
waiting
three
years
to
get
it.
Wouldn’t
you
rather
have
the
$900
now
to
invest,
to
start
a
business,
or
even
payoff
old
debts
that
may
be
at
a
high
interest
rate?
With
the
$900
in
your
pocket
now,
you
could
earn
much
more
than
the
$100
cost
for
waiting
for
the
full
$1,000
three
years
from
now.
The
difference
between
the
$1,000
and
the
$900
is
called
the
discount,
which
in
this
instance
would
be
$100.
All
cash
flow
assets
are
purchased
at
a
discount.
That
is
how
funding
sources,
such
as
Capital
Funding
of
America,
derive
what
the
return
will
on
the
on
the
money
paid
to
you.
The
discount
rate
will
affect
what
you
are
paid
due
to
many
variables,
including
how
far
in
the
future
your
payments
are
scheduled
to
be
received
and
the
creditworthiness
of
the
one
making
the
payments
to
you.
The
farther
into
the
future
an
individual
payment
is
to
be
received
by
the
funding
source,
the
less
you
will
receive
for
that
payment.
The
reasoning
is
that
the
funding
source
must
receive
a
return
for
its
capital
for
each
day
that
the
payment
is
not
received
from
the
payor--the
one
making
the
payments
under
the
cash
flow
asset
instrument
being
sold.
The
more
days
until
a
payment
is
received
by
the
funding
source,
the
less
the
funding
source
can
pay
you
for
the
acquisition
of
your
asset
in
order
to
maintain
its
required
yield.
The
second
aspect
that
affects
the
purchase
price
of
cash
flow
assets
is
risk--that
is--
will
the
funding
source
receive
all
of
the
payments,
and
will
they
be
paid
in
a
timely
fashion.
Please
remember
that
the
creditworthiness
of
your
payor,
(the
one
responsible
for
making
the
payments
to
you),
determines
the
risk
factor
of
your
cash
flow
asset
instrument.
The
discounting
of
cash
flow
assets
and
the
length
of
time
over
which
the
funding
source
is
repaid
often
is
a
difficult
premise
for
sellers
to
grasp
for
these
types
of
transactions.
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