Which valuation method estimates the present value of expected future cash flows?

The income approach is the correct valuation method that estimates the present value of expected future cash flows. This approach is based on the premise that the value of an asset is equal to the present value of the cash flows it is expected to generate in the future. By discounting these cash flows back to their present value using a specific discount rate, analysts can determine the worth of the asset as it relates to its capacity to generate income over time.

This method is particularly useful in various contexts, such as real estate, business appraisals, and other investment evaluations, where understanding the future earnings potential is critical. The income approach assumes that future financial performance can be reliably forecasted and typically incorporates adjustments for risk, growth, and other factors that could affect cash flows.

In contrast, the market approach focuses on comparing the asset with similar ones that have recently sold, assessing market trends and prices rather than evaluating cash flow potential directly. The cost approach estimates value based on the costs incurred to create or replace the asset, while the historical cost approach records the asset's original purchase cost adjusted for depreciation, which does not directly relate to future cash flow assessments.