Discounted Cash Flow Methods

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The methods of appraising capital expenditure proposals can be classified into two broad categories

  1. Unsophisticated or traditional
  2. Sophisticated or time adjusted

 

The latter are more popularly known as discounted cash flow techniques as they take the time factor into account .In this method all cash flows are expressed in terms of their present values .It recognises that cash flow streams at different time periods differ in value & can be compared only when they are expressed in terms of a common denominator i.e., present values.

 

The following are the various discounted cash flow techniques –

Net present value

Internal rate of return

Profitability index

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