Time value of money calculations, including net present value analysis, is important when selecting projects and investments. The calculations are part of the body of knowledge for some of ASQ’s certification exams. They also go a long way toward explaining exactly what happened to Silicon Valley Bank (SVB) just a couple of months ago.

The basic idea is that future money is not worth as much as today’s money. If money invested today can accumulate interest to be worth more, say, five years from now, it follows that an amount of money five years from now is worth less in today’s money (e.g., $1,000 five years from now might be worth only $800 in today’s money). Future amounts must be discounted as a function of 1) the required rate of return on investments; and 2) time. This is the origin of the phrase “discounted cash flow.”

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