What method of investment appraisal considers interest rates to determine the present value of future income?

The method of investment appraisal that considers interest rates to determine the present value of future income is Discounted Cash Flow (DCF). DCF is based on the principle of the time value of money, which asserts that a specific amount of money today is worth more than the same amount in the future due to its potential earning capacity.

In practice, DCF takes future cash flows expected from an investment and discounts them back to their present value using a specific interest rate, commonly referred to as the discount rate. This allows businesses to evaluate the value of future cash inflows in today’s terms, thereby providing a clearer picture of the profitability and viability of a potential investment. The present value calculated through DCF makes it easier for decision-makers to compare different investment options, especially when the cash flows occur at different times.

Other methods mentioned do not incorporate interest rates in the same way. For instance, the Average Rate of Return evaluates the return on investment as a percentage of the initial outlay without accounting for the timing of cash flows or the time value of money. The Payback Period method focuses solely on the time it takes to recover the initial investment without considering the potential earnings or fluctuations in cash flows beyond that recovery point. Net Cash Flow simply refers to the