Which investment appraisal technique uses discounting to determine profitability over time?

• A. Accounting Rate of Return
• B. Net Present Value
• C. Payback Period
• D. Qualitative Investment Appraisal

Answer: (B)

Discounting future cash flows to reflect the time value of money is the key idea here. Net Present Value uses this by turning every expected cash inflow and outflow into its present value at a chosen discount rate (often the cost of capital) and then subtracting the initial investment. The result shows how much value the project adds in today’s terms. A positive NPV means the project earns more than the cost of capital and adds value; a negative NPV means it would destroy value.

Other methods don’t do this in the same way. The accounting rate of return uses accounting profits and ignores the timing of those profits. The payback period looks only at how long it takes to recover the initial outlay and ignores profits after payback and the time value of money. Qualitative investment appraisal relies on non-numeric factors rather than a numeric profitability measure.

So, the technique that uses discounting to determine profitability over time is Net Present Value.