A dollar today is worth more than a dollar tomorrow — present value discounts future cash to today's terms.
Try this
5
PV = 1000 / (1.08)ⁿ (at an 8% discount rate) = —
Why discount?
Money you have now can be invested and grow, so future money is worth *less* today. The further away the cash and the higher the rate, the more it shrinks.
Try it
$100 received in 5 years, discount rate 8%
PV = 100 / 1.08⁵ ≈ $68.06.
Your turn
Would you rather have $1,000 today or $1,200 in 3 years, if you can earn 6%? (Compare PVs.)
Present value
Try it
$100 in 5 years at 8%
PV = 100 / 1.08⁵ ≈ $68.06.