Explain Present worth method.

The Present Worth Method is a financial analysis technique used to evaluate the economic feasibility of investment projects or financial decisions. It involves determining the present value of future cash flows associated with the project or decision.

In this method, future cash flows expected to be generated by the investment are discounted back to their present value using an appropriate discount rate. The discount rate reflects the opportunity cost of capital or the rate of return that could be earned from alternative investments with similar risk profiles.

The present value of each future cash flow is calculated by dividing the expected cash flow by a factor of (1 + discount rate) raised to the power of the time period in which the cash flow is expected to be received. This process accounts for the time value of money, recognizing that a dollar received in the future is worth less than a dollar received today due to factors such as inflation and the potential for investment returns.

Once the present values of all expected cash flows are determined, they are summed together to obtain the net present value (NPV) of the investment. If the NPV is positive, it indicates that the investment is expected to generate returns in excess of the required rate of return and is therefore considered economically viable. Conversely, if the NPV is negative, it suggests that the investment may not be financially attractive and should be reconsidered.

Overall, the Present Worth Method provides a comprehensive way to assess the financial viability of investment projects by considering the time value of money and discounting future cash flows back to their present value.