Since investors prefer to have money now rather than later, money received next week, instead of today, is not worth as much to those receiving it, assuming the magnitude of the cash flow in each period is the same. Therefore an adjustment to the prospective cash flows is required. This process is referred to as:
A) compounding
B) discounting
C) amortizing
D) hedging

Question

Quizplus · Accepted Answer

Discounting is the process of adjusting future cash flows to reflect the time value of money. It involves reducing the value of future cash flows by an appropriate discount rate, which reflects the opportunity cost of waiting to receive the money. This makes it comparable to cash flows received today, allowing investors to make better investment decisions. Compounding involves calculating the future value of money invested today, while amortizing refers to the process of paying off a loan or debt over time. Hedging, on the other hand, involves using financial instruments to reduce the risk of an investment.

Since Investors Prefer to Have Money Now Rather Than Later