The value of an asset is the ________ of its expected future cash flows.
Click on the arrows to vote for the correct answer
A. B. C. D.A
The value of an asset is the net present value or NPV of its expected future cash flows.
The value of an asset is typically determined by considering its expected future cash flows. These cash flows refer to the projected income or benefits that the asset is expected to generate over its lifespan.
Among the given options, the most appropriate answer is B. weighted sum.
The value of an asset is determined by calculating the present value of its expected future cash flows. The present value takes into account the time value of money, which means that cash flows received in the future are worth less than the same amount of cash received today.
To calculate the present value, each future cash flow is discounted back to its present value using an appropriate discount rate. The discount rate reflects the risk and opportunity cost associated with the asset. The higher the risk or opportunity cost, the higher the discount rate used, resulting in a lower present value.
In practice, the present value of each future cash flow is multiplied by a weight that represents the probability or likelihood of that cash flow occurring. This weight is usually determined by assessing the risk associated with each cash flow. By assigning weights, the calculation accounts for the uncertainty of receiving those cash flows and provides a more accurate estimation of the asset's value.
Once the present values of all the expected future cash flows have been calculated and weighted, they are summed together to arrive at the total value of the asset. This summation of the present values is known as the weighted sum.
Therefore, option B, "weighted sum," is the correct answer as it accurately represents the process of determining the value of an asset based on the expected future cash flows.