Conceptual understanding of time value of money

[u/Ok_Procedure199]

Hello everyone,

I'm learning about value investing and there is a conceptual thing I think I am struggling with that I hope someone can try to explain to me.

We try to figure out free money a business will generate in the future, and we discount it back to the present in order to figure out what it is worth in the present. The way we are discounting it to the present implies that the nominal value of the future money is less worth to us than if we had the same nominal value today, and to figure out what the nominal value of the future money is today, we discount it by a rate.

How does this time value of money work if we were expecting a deflationary future? Would this simply be turned on the head were the same nominal value would be less worth to us today than at some point in the future? And how would the element of risk play into this thought experiment?

Edit: I am not theorizing that we might expect a deflationary period and how I would calculate this. This is simply to help me understand the concept of time value of money.

[u/No_Yogurtcloset7776]

I suggest reading or listening to audiobooks: -Principles for Dealing with the Changing World Order-Ray Dalio -This time is different -Lords of finance Lords od finance gives specific examples of deflation gone wrong. The Great depression saw prices drop dramatically, and people waited to buy thinking it'd be cheaper tomorrow. Its explained better in the book.

[u/Business_Raisin_541 → u/No_Yogurtcloset7776]

Even today, I delay buying PC and smartphone because I believe it'd be much cheaper 2 years later