Why is it important to discount the terminal value back to its present value?

Discounting the terminal value back to its present value is essential because it provides an accurate estimate of the company's value today. Terminal value typically accounts for the bulk of the total value in a discounted cash flow analysis, representing all future cash flows beyond a certain point. When this value is projected at a future date, it is not representative of what it would be worth in today's terms due to the time value of money.

By applying a discount rate to the terminal value, you're adjusting for the opportunity cost of capital, effectively translating future cash flows into a present value. This process allows investors and analysts to make informed decisions based on the current value of expected future earnings, enabling them to assess if an investment aligns with their financial goals and risk appetite.

While the other options touch upon related concepts such as risks and inflation, they do not directly address the primary reason for discounting terminal value: to ascertain the current valuation of the firm based on its future earning potential.