What is the procedure called that converts future net benefits into present value?

The procedure that converts future net benefits into present value is known as discounting. This process is fundamental in finance and valuation, as it allows for the assessment of the worth of future cash flows in terms of today's dollars. The concept is based on the principle of the time value of money, which posits that a dollar received today is worth more than a dollar received in the future due to its potential earning capacity.

In discounting, a specific interest rate or discount rate is applied to future cash flows, effectively reducing their value to reflect the risk and opportunity cost associated with waiting to receive those cash flows. This technique is widely used in various fields, including investment analysis, real estate valuation, and financial forecasting, to determine the present value of future income, such as rental income or business revenues.

For instance, if you expect to receive cash flows of $1,000 a year from an investment for the next five years, you would apply discounting to find out how much those future payments are worth in today's terms. This allows decision-makers to evaluate the attractiveness of investments or projects more effectively.

In contrast, other options like capitalization and yield analysis refer to different concepts in valuation and finance. Model calibration pertains to adjusting valuation models to better fit observed data