What process is used to find present value by adjusting future cash flows to the base time?

The process of finding present value by adjusting future cash flows to a base time is known as discounting. This technique involves applying a discount rate to future cash flows, which accounts for the time value of money—the concept that a certain amount of money today is worth more than the same sum in the future due to its potential earning capacity. By employing discounting, you can translate expected future earnings into their current worth, enabling stakeholders to make informed financial decisions.

In financial analysis and project valuation, discounting is crucial for assessing investment viability and profitability. It provides a method to evaluate how future cash inflows (or outflows) will contribute to the current financial landscape, allowing for accurate comparisons between different time periods.

Capitalization generally refers to a method of determining the value of an asset based on its future earnings, but it operates differently than discounting as it often relies on applying a capitalization rate rather than adjusting future cash flows to present value.

Investment analysis and cost-benefit analysis entail broader evaluations of the viability and performance of projects but do not specifically define the mechanism of adjusting future cash flows to present value as discounting does. Instead, these analyses may incorporate various financial metrics, including discounted cash flows, among other factors.