{"id":576,"date":"2014-07-09T16:31:03","date_gmt":"2014-07-09T16:31:03","guid":{"rendered":"http:\/\/zh.aceessays.com\/tc\/?p=576"},"modified":"2016-11-08T15:50:09","modified_gmt":"2016-11-08T15:50:09","slug":"discounted-cash-flow-techniques","status":"publish","type":"post","link":"https:\/\/www.aceessays.com\/tc\/discounted-cash-flow-techniques\/","title":{"rendered":"Discounted Cash Flow Techniques"},"content":{"rendered":"<h3>Payback period<\/h3>\n<ul>\n<li>Disadvantages:<\/li>\n<li>Considers cash flows within the payback period only: says nothing about project asa whole* or the profitability<\/li>\n<li>Ignores size and timing of cash flows<\/li>\n<li>Ignores time value of money (although discounted payback can be used)<\/li>\n<li>It does not really take account of risk<\/li>\n<\/ul>\n<h3>Discounted Cash Flow Techniques<\/h3>\n<ul>\n<li>Net present value (NPV)<\/li>\n<li>Internal rate of return (IRR)<\/li>\n<li>Time value of money is taken into account<\/li>\n<li>Applies a discount rate*<\/li>\n<\/ul>\n<ul>\n<li>Example:<\/li>\n<li>Project costing \uffe11,000 is expected to yield \uffe1500 per year for 2 years. Cost of capital is 10%<\/li>\n<li>What is the NPV?<\/li>\n<li>Year Net cash flow (X) DF = PV<\/li>\n<li>\uffe1 10% \uffe1<\/li>\n<li>1 500 0.909 455<\/li>\n<li>2 645 0.826 532.77<\/li>\n<li>987.77<\/li>\n<li>less initial cost 1,000<\/li>\n<li>Net present value (12.23)<\/li>\n<li>Would you accept the project?<\/li>\n<\/ul>\n<p>2. Net present value (NPV)<\/p>\n<h3>Net present value<\/h3>\n<ul>\n<li>Difference between PV of future benefits and present value of capital invested, discounted at company\u2019s cost of capital (hurdle rate)<\/li>\n<li>NPV decision rule is to accept all projects with a positive NPV<\/li>\n<li>With mutually exclusive projects, select project with highest NPV<\/li>\n<li>Regarded as the best investment appraisal method by academics<\/li>\n<\/ul>\n<ul>\n<li>Advantages:<\/li>\n<li>Takes account of time value of money<\/li>\n<li>Uses cash flow, not accounting profit<\/li>\n<li>Takes account of all relevant cash flows over lifeof project<\/li>\n<li>Can take account of conventional and non-conventional cash flows, as well as changes in discount rate during project<\/li>\n<li>Gives absolute measure of project value<\/li>\n<\/ul>\n<p>Net present value<\/p>\n<h3>Net present value<\/h3>\n<ul>\n<li>Disadvantages:<\/li>\n<li>Project cash flows may be difficult to estimate (but applies to all methods).<\/li>\n<li>Accepting all projects with positive NPV only possible in a perfect capital market.<\/li>\n<li>Cost of capital may be difficult to find.<\/li>\n<li>Cost of capital may change over project life, rather than being constant.<\/li>\n<\/ul>\n<p>Professional <a href=\"http:\/\/www.aceessays.com\/\">Essary Writing<\/a>: www.aceessays.com<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Payback period Disadvantages: Considers cash flows within the payback period only: says nothing about project asa whole* or the profitability Ignores size and timing of cash flows Ignores time value of money (although discounted payback can be used) It does not really take account of risk Discounted Cash Flow Techniques Net present value (NPV) Internal rate of return (IRR) Time value of money is taken into account Applies a discount rate* Example: Project costing \uffe11,000 is expected to yield \uffe1500 per year for 2 years. Cost of capital is 10% What is the NPV? Year Net cash flow (X) DF = PV \uffe1 10% \uffe1 1 500 0.909 455 2 645 0.826 532.77 987.77 less initial cost 1,000 Net present value (12.23) Would you accept the project? 2. Net present value (NPV) Net present value Difference between PV of future benefits and present value of capital invested, discounted at company\u2019s [&hellip;]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[22],"tags":[],"class_list":["post-576","post","type-post","status-publish","format-standard","hentry","category-notes"],"_links":{"self":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/576","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/comments?post=576"}],"version-history":[{"count":1,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/576\/revisions"}],"predecessor-version":[{"id":1627,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/posts\/576\/revisions\/1627"}],"wp:attachment":[{"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/media?parent=576"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/categories?post=576"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.aceessays.com\/tc\/wp-json\/wp\/v2\/tags?post=576"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}