What is the method for determining present value from a future value called?

The method for determining present value from a future value is known as discounting. This process involves taking a future cash flow and calculating its current worth by applying a discount rate, which reflects the time value of money. The underlying principle is that a specific amount of money today is worth more than the same amount in the future due to its potential earning capacity. By discounting future values, one is able to account for this time value and arrive at a present value that represents what that future sum is worth right now.

In contrast, other methods such as capitalization relate more to the valuation of income-producing assets rather than converting future amounts to present value. Amortization involves spreading out a loan into a series of fixed payments over time, and depreciation refers to the reduction in value of an asset over time due to wear and tear or obsolescence. Therefore, discounting specifically focuses on the conversion of future financial sums into their present equivalents, making it the correct approach in this context.