Imagine a business (the machine) that produces predictable cash flows: $50,000 per year for five years. A naïve approach might value the machine at $250,000 ($50K × 5). But this ignores a foundational principle in finance: money today is more valuable than money tomorrow.

The time value of money (TVM) tells us that each future $50,000 payment must be adjusted (discounted) based on how far in the future it arrives. This adjustment reflects opportunity cost, risk, and inflation.

If we assume a discount rate of, say, 10%, the DCF would look like this:

$\text{DCF} = \frac{50{,}000}{(1 + 0.10)^1} + \frac{50{,}000}{(1 + 0.10)^2} + \cdots + \frac{50{,}000}{(1 + 0.10)^5}$

You'll see that each year's cash flow is worth less in today's dollars. The total DCF will be less than $250,000.

This technique allows you to compare investments or business opportunities that may have the same total return but very different timing profiles.

Think of it like this: would you rather get $50,000 now, or in five years? Most people choose "now"—because they could invest, use, or save it today. DCF helps capture that preference numerically.