Undiscounted future cash flows
/What are Undiscounted Future Cash Flows?
Undiscounted future cash flows are cash flows expected to be generated or incurred by a project, which have not been reduced to their present value. This condition may arise when interest rates are so near zero or expected cash flows cover such a short period of time that the use of discounting would not result in a materially different outcome.
You may elect to use undiscounted future cash flows when developing a rough estimate of the cash flows associated with a short-term or medium-term project, just to see if there may be sufficient positive cash flows to warrant a more detailed investigation. If so, be sure to use discounting as part of a more refined second pass, to ensure that the cash flows are indeed sufficient to justify investing in the project.
When to Use Undiscounted Future Cash Flows
Undiscounted future cash flows can be useful in specific analysis scenarios where timing and present value are less critical than overall recoverability or sufficiency. Key situations include the following:
Asset recoverability assessments. When testing whether an asset’s carrying amount is recoverable (e.g., under U.S. GAAP impairment testing), undiscounted cash flows help determine if the asset will generate enough total cash to justify its book value.
Preliminary project screening. For quick evaluations of investment viability, undiscounted cash flows provide a rough sense of total return potential without the complexity of discounting.
Cash flow forecasting. Companies may use undiscounted cash flows for operational planning, focusing on raw cash inflows and outflows rather than time-adjusted values.
Regulatory reporting. Certain frameworks (e.g., statutory accounting) require liability projections using undiscounted amounts to meet regulatory compliance, especially for reserve sufficiency checks.
These approaches prioritize completeness or compliance over valuation precision.