Time value of money

The time value of money is the idea that a dollar received today is worth more than a dollar received in the future, even setting aside any risk that the future payment might not arrive at all. Money available today can be put to work immediately, and inflation quietly erodes what a future dollar will actually be able to buy by the time it arrives.

This is the reason a discounted cash flow model does not simply add up a company's projected future cash flows. Every future year's cash gets discounted, shrunk down to what it would be worth if received today, before it counts toward anything. The further out a cash flow sits, and the higher the discount rate used, the smaller its present value becomes.