Why must the terminal value be discounted back to the present?

The terminal value represents the estimated value of a business at the end of a forecast period, capturing the bulk of the company's value beyond the projection horizon. To understand its true worth, this future value must be discounted back to the present value. This process aligns with the principle of time value of money, which states that a dollar received today is worth more than a dollar received in the future due to the potential earning capacity of that dollar over time. Thus, by discounting the terminal value back to the present, one can accurately assess what that future cash flow or value is worth in today's terms. This allows investors and analysts to make informed decisions about current investments by placing a value on expected future cash flows in today's context.