Scribd
Upload
7 views

Discount

Discounted future cash flows, or Present Value (PV), is a financial method to assess the current value of future cash flows by applying a discount rate, reflecting the time value of money. This technique is essential for accounting for uncertainty, risk, inflation, and opportunity costs. The process involves identifying future cash flows, selecting a discount rate, applying the discounting formula, and summing the discounted cash flows.

Uploaded by

Ammar Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
7 views

Discount

Discounted future cash flows, or Present Value (PV), is a financial method to assess the current value of future cash flows by applying a discount rate, reflecting the time value of money. This technique is essential for accounting for uncertainty, risk, inflation, and opportunity costs. The process involves identifying future cash flows, selecting a discount rate, applying the discounting formula, and summing the discounted cash flows.

Uploaded by

Ammar Ahmed
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 1

Discounted future cash flows to the present, also known as Present Value

(PV), is a financial technique used to determine the current value of a series


of future cash flows by applying a discount rate. This process accounts for
the time value of money, which states that a dollar today is worth more
than a dollar in the future due to its earning potential.

Why Discount Future Cash Flows?

 Future cash flows are uncertain and less valuable than current cash
flows.
 Discounting adjusts for risk, inflation, and the opportunity cost of
capital.
 It allows for comparison of cash flows occurring at different times.

Steps to Discount Future Cash Flows to the Present:

1. Identify Future Cash Flows:


o Determine the amounts and timing of future cash flows (e.g.,
annual revenues, costs, or investments).
2. Choose a Discount Rate:
o Select an appropriate discount rate (e.g., interest rate, cost of
capital, or required rate of return).
3. Apply the Discounting Formula:
o Use the present value formula to discount each cash flow to its
present value.
4. Sum the Discounted Cash Flows:
o Add up all the present values to get the total present value of the
cash flows.

You might also like