Question

Present Value and Discounting

1. What do we mean by the present value of an investment?
2. The process of discounting a future amount back to the present is the opposite of doing what?
3. What do we mean by discounted cash flow, or DCF, valuation?

Answer 1

A. Present value of an investment will mean that the value of future stream of the cash flows associated with the investment will be discounted at the present in order to find out the overall value of the investment at the present value so it will be impacting the time value of the money in order to find out the current value by discounting the cash flows

B. The process of discounting a future amount back to the present is the opposite of compounding It back to the Future so compounding is related to oo compounding of the present value of the cash flows at the future date and it is known as the future value

C. Discounted cash flow valuation is a valuation technique in which all the cash flows associated with the future of the company is discounted at the present in order to find out the share price of the company and valuation method can be associated with other assets as well in order to find out the discounting of future cash flows that the present value in order to derive the value of the security.