The act of determining the
present value of future
cash flows. Because
money is subject to
inflation and has the ability to
earn interest, one dollar today is worth more than one dollar tomorrow. Discounting, then, is the act of determining how much less tomorrow's dollar is worth. For example, a
bank may
loan a sum of money and schedule repayments at $100 per month for 10 years. The bank may then discount the value of payments and determine exactly how much (in today's dollars) it will have received once the loan is paid off.