Time Discounting Concept

The Concept of Discounting for Time

Most important decisions have consequences in the future as well as in
the present. A given amount of
money does not have the same value when you possess it now compared
to getting it in some future year. Nor do non monetary consequences
have the same value for us if they will occur far in the future as if they were
to occur now. If this idea is not immediately obvious to you, ask yourself
whether you would be willing to lend a hundred rupees to me now, and
then get back from me the same amount five years from now. (If the answer
is yes, please express the money to me as soon as possible.)
Please notice that your reluctance to lend me money and get back the
same amount later—an interest-free loan—has nothing to do with inflation;
we could easily modify the arrangement to allow for inflation.
Rather, you will not consider this a good deal because having the use of
the money for the next five years has a value for you as well as for me,
just as having the use of a farm for the next five years has value and the
renter therefore pays for the right to do so.
The concept of time-discounting enables us to handle all the above
examples. With the discounting device we can appropriately weigh the
incomes and outgoes in various future periods, and then add the set of
them into a single overall sum, which is called the present value of the
stream of future incomes and outgoes. This is the core idea in making decisions
about investments and other actions taken in the present that will have
ramifications long into the future. Time-discounting is the single most important
and powerful idea in all of managerial decision-making.

Think of time as a measurement. Indeed, the fundamental idea underlying
Albert Einstein’s theory of relativity is that, as he put it, “we understand
by the ‘time’ of an event the reading [position of the hands] of
. . . clocks.”
Indeed, time is the most important measurement because the length
of the period during which an event takes place measures how much
pleasure or pain we will experience. Furthermore, the time distance into
the future measures how important the upcoming event is to us now.