Discounted Cash Flow Analysis Test Questions and Answers
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Course
Discounted Cash Flow
Institution
Discounted Cash Flow
Discounted cash flow analysis a technique used that adjusts for time value of money making cash flows over time comparable
Discounted cash flow analysis limitations - unrealistic status quo - Hurdle (discount) rates are to high - Time horizons are to narrow - difficulty of gaining approval for lar...
Discounted Cash Flow Analysis Test
Questions and Answers
Discounted cash flow analysis ✅a technique used that adjusts for time value of money
making cash flows over time comparable
Discounted cash flow analysis limitations ✅- unrealistic status quo
- Hurdle (discount) rates are to high
- Time horizons are to narrow
- difficulty of gaining approval for large projects
- exclusion of benefits that are difficult to quantify
- greater uncertainty about operating cash flows of new untested technology
investments
Tangible and intangible benefits of technology invesment ✅Tangible - Physical / Real
can be readily measured and quantified e.g Inventory reduction, overtime reduction,
direct materials reduction
Intangible - Harder to quantify e.g increased flexibility, reduced lead time, greater
reduction of throughput
Time value of money ✅Concept that if offered 1 dollar today or 1 dollar in 1 year most
people will take the 1 dollar today. Time value of money is the value of the dollar that
could be earn t in 1 year.
DCF Analysis "discounts" the cash flows of future years to make them equivalent to
those in the current year
Discounted cash flow analysis methods
Net Present Value (NPV) Method ✅calculates the present value of future cash floes of
a project - Four steps needed to complete a NPV analysis of a investment proposal.
1. Prepare table showing cash flows during each year
2.Calculate present value of each cash flow using the required rate of return
3.Calculate NPV = sum of present values of the cash flows in each period
4.NPV if positive means project is acceptable on financial grounds, higher NPV more
acceptable the project. Other strategic and quantitative issues need to be considered in
decision
Internal rate of return (IRR) method ✅Calculates actual economic return earned by the
project over it's life
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