Discounted Cash Flow

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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?

May 31st, 2015


Definition Of NPV;

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: 

Net Present Value (NPV)

where:

Ct = net cash inflow during the period

Co= 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

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May 31st, 2015
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