What is a future euro worth today, and why does it matter for stocks?

Before we can value a company's future cash, we need one honest exchange rate: the price of time. A euro in your hand today is worth more than a euro promised next year — and putting a number on exactly how much more is the engine of every valuation.

Why later is worth less

Three plain reasons a future euro is worth less than a present one:

• You could invest it. A euro today can earn a return in the meantime; a euro next year cannot.
• Risk. A promise of future cash might not fully arrive. Distance adds doubt.
• Inflation. The euro that shows up later may buy less than the one you have now.

Bundle all three into a single discount rate — call it 8% for now — and you have a rule for turning future money into present money.

Discounting, in one move

To bring one future euro back to today, you divide by (1 + rate) once for each year of waiting:

• €108 one year out, at 8%, is worth €108 ÷ 1.08 ≈ €100 today.
• €100 two years out is worth €100 ÷ 1.08 ÷ 1.08 ≈ €86 today.
• €100 ten years out is worth only about €46 today.

That last line is the whole intuition: at 8%, cash a decade away is worth under half its face value now. The further out the cash, the more time shrinks it. This is why each near-term year counts for more than each distant one, and the distant future, though it stretches on, contributes surprisingly little per year. Per year is the catch: Unit 3 will show that the distant future arrives in such bulk that the terminal value is still usually the largest single piece of a DCF.

Present value is just discounted cash, added up

Take every future year's expected cash, discount each back to today, and sum them. That sum is the present value — the today-money worth of a stream of tomorrow-money. A DCF is nothing more grand than doing this carefully for a business.

Try it now

1. Pick a discount rate that feels reasonable to you (7–10% is a common starting range for a stable company) and, on paper, discount €100 received in years 1, 5, and 10. Watch it fall from €100 to something small. Do this before opening anything — the arithmetic is the lesson.
2. Now put a real number through it. The free cash flow row below is operating cash flow minus capital expenditure, which is the "free-ish" figure the next unit makes precise:

3. Ask: if that same amount arrived every year for 10 years, is the sum of the discounted values closer to 6× or 10× one year's cash? (It is closer to 6–7× — discounting is why "10 years of cash" is never worth 10 times one year.)
4. Do it once more with a second company's latest free cash flow, and at two different rates. Coca-Cola's is the fourth row of this table:

The gap between the two answers is the price of time, measured.