The formula is used in a number of ways, two of which are distinguishable and particularly significant:
(i) The value of real money, as opposed to ideal money, is not stable over time, so the formula can be used to reflect this. The idea is to bring a series of cash flows occurring at different times into the same calculation, and for this they need to be measured in the same units (e.g. Pounds Sterling at Time 0)
The simple factor you have cited assumes (in this context) a steady decline in value over time, which would be captured by such concepts as inflation - often thought of as the increasing price of goods and services, but equally well conceived as the declining purchasing power of money.
(ii) In evaluating investment opportunities, a business will want to know that they offer an adequate rate of return, higher than the cost of capital available to fund such projects, and also to compare different business opportunities against one another. Here the interest rate, or discount rate, can be treated as a hurdle rate - taking account of the outlays and revenues, will this investment generate cash/returns sufficient to justify the investment? Here you would discount at the required rate of return, and see whether the answer was positive or negative, before doing other things like a risk analysis. A closely related concept is the Internal Rate of Return, which is the rate which exactly matches the cash flow profile of the project and so gives a zero answer. Here the essential idea that having £100 now is more valuable to you than having £100 in five years time. If you have £100 now, you can keep it for five years, but you have other options too.
In each case the formula adjusts future cash flows to a comparable present value and therefore allows different cash flow profiles to be compared with one another using a consistent measure.