What is the term for valuing an investment by discounting its future cash flows?

Prepare for the SASB Fundamentals of Sustainability Accounting Level II Test. Study with multiple choice questions, gaining hints and explanations. Enhance your sustainability reporting skills and ace your exam!

Multiple Choice

What is the term for valuing an investment by discounting its future cash flows?

Discounted cash flow describes valuing an investment by discounting its future cash flows to their present value. This reflects the time value of money and risk, using a discount rate to convert each expected future cash flow into today’s dollars. When you sum these present values, you get the investment’s overall value under the DCF approach. The other terms differ in meaning: net present value is the present value of cash inflows minus outflows (the result of applying the DCF method to a project), internal rate of return is the discount rate that makes the net present value zero, and break-even is simply when revenues equal costs.

Discounted cash flow describes valuing an investment by discounting its future cash flows to their present value. This reflects the time value of money and risk, using a discount rate to convert each expected future cash flow into today’s dollars. When you sum these present values, you get the investment’s overall value under the DCF approach.

The other terms differ in meaning: net present value is the present value of cash inflows minus outflows (the result of applying the DCF method to a project), internal rate of return is the discount rate that makes the net present value zero, and break-even is simply when revenues equal costs.

More practice questions