Discounting cash flows involves

Question

Quizplus · Accepted Answer

Discounting cash flows involves reducing the value of future cash flows to reflect the time value of money. This means that cash flows in the future are worth less than cash flows today because there is some level of uncertainty about what will happen in the future. By discounting future cash flows, we are essentially converting them into today's dollars so that we can compare them to current costs or investments. Option A is incorrect because taking cash discounts on trade merchandise has nothing to do with discounting cash flows. Option B is incorrect because it suggests that we should only consider cash flows in the first 4 years, when in reality, we want to consider all cash flows across the entire project timeline. Option D is incorrect because we do not multiply expected future cash flows by the cost of capital, but rather, we apply a discount rate to those cash flows. Option E is incorrect because there is no rule that only cash flows occurring 10 years in the future should be discounted.

Discounting Cash Flows Involves