Discounted cash flow techniques are capital budgeting techniques that take into account both the time value of money and the estimated net cash flow from an investment. These techniques take into account the fact that cash flows that occur early in the life of an investment will be worth more than those that occur later. The primary discounted cash flow technique is called net present value. Describe this method. How is the NPV calculated and what is the decision rule?

The difference between the present value of cash inflows
and the present value of cash outflows. NPV is used in capital budgeting
to analyze the profitability of an investment or project.

The following is the formula for calculating NPV:

where:

C_{t} = net cash inflow during the period

C_{o}= initial investment

r = discount rate, and

t = number of time periods

In addition to the formula, net present value can often be calculated
using tables, as well as spreadsheets such as Microsoft Excel.

May 31st, 2015

Are you studying on the go? Check out our FREE app and post questions on the fly!