Discounting calculates the present value of future money using a discount rate. This principle reflects the time value of money, meaning money today is more valuable than the same amount in the future because it can earn interest.

In capital budgeting, discounting calculates the profitability of long-term projects by finding the net present value (NPV). For bonds, discounting finds the present value of future interest payments and final repayment, helping investors decide if a bond is priced fairly. In retirement planning, discounting estimates the present value of future retirement benefits or savings for better financial planning. In environmental economics, discounting assesses the present value of long-term benefits and costs, guiding investments in sustainable projects. In legal fields, discounting calculates the present value of future damages or settlements in personal injury and wrongful death cases, ensuring fair compensation.

For example, when valuing a bond, future interest payments (coupons) and the final repayment amount (par value) are reduced by a specific interest rate to find their worth today. For businesses, an asset is valuable only if it will produce cash in the future. By applying a discount rate, we can determine what those future cash flows are worth today's money.