What technique uses a risk-adjusted discount rate and contractual, promised, or most likely cash flows?
Click on the arrows to vote for the correct answer
A. B. C. D.D
The correct answer to the question is C. Present value.
The technique mentioned in the question refers to the process of discounting cash flows to their present value. Present value is a financial concept used to determine the current worth of future cash flows. It takes into account the time value of money, which recognizes that a dollar received in the future is worth less than a dollar received today due to factors such as inflation and the potential to earn interest or returns on investment.
The use of a risk-adjusted discount rate is an essential component of the present value calculation. A discount rate is the rate of return used to bring future cash flows back to their present value. It reflects the risk associated with the investment or cash flow stream being evaluated. The higher the risk, the higher the discount rate will be.
By applying a risk-adjusted discount rate to the future cash flows, the present value technique accounts for the uncertainty and risk involved in the investment or contractual obligations. The risk-adjusted discount rate is typically determined based on factors such as the cost of capital, market conditions, and the specific risks associated with the investment or contract.
The other options listed as potential answers are not correct in the context of the question:
A. Asset/Liability weighted: Asset/liability weighting refers to a method used in portfolio management to determine the appropriate allocation of assets based on the risk and return objectives of the investor. It is not directly related to the technique described in the question.
B. Fair value: Fair value is a financial concept used to determine the value of an asset or liability based on an objective assessment of market conditions and other relevant factors. While fair value may be considered in certain financial analyses, it is not specifically related to the described technique of using a risk-adjusted discount rate and cash flows.
D. Discount rate adjustment: The term "discount rate adjustment" is not a recognized term or technique in finance or valuation. It does not accurately describe the process of using a risk-adjusted discount rate and cash flows to determine present value.
In summary, the technique described in the question that utilizes a risk-adjusted discount rate and contractual, promised, or most likely cash flows is known as present value. It is a fundamental concept in finance and valuation, allowing for the evaluation of future cash flows in terms of their current worth.