When you're in a worksheet for capital budgeting, how do you apply the discount rate to Cash Flow so you can discount the future cash flows?Select an answer:the discount rate raised to the number of years in the future, then divide Cash Flow by that resultone plus the discount rate raised to the number of years in the future, then multiply Cash Flow by the numberthe discount rate raised to the number of years in the future, then multiply Cash Flow by that resultone plus the discount rate raised to the number of years in the future, then divide Cash Flow by that result
Question
When you're in a worksheet for capital budgeting, how do you apply the discount rate to Cash Flow so you can discount the future cash flows?Select an answer:the discount rate raised to the number of years in the future, then divide Cash Flow by that resultone plus the discount rate raised to the number of years in the future, then multiply Cash Flow by the numberthe discount rate raised to the number of years in the future, then multiply Cash Flow by that resultone plus the discount rate raised to the number of years in the future, then divide Cash Flow by that result
Solution
The correct answer is: one plus the discount rate raised to the number of years in the future, then divide Cash Flow by that result.
Here are the steps to apply the discount rate to Cash Flow:
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Add 1 to the discount rate. The discount rate is the rate of return required by an investor.
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Raise the result to the power of the number of years in the future. This calculates the discount factor.
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Divide the Cash Flow by the result from step 2. This gives you the present value of the future cash flow.
This process is known as discounting the future cash flows. It's used in capital budgeting to determine the present value of future cash flows, taking into account the time value of money.
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