Question

How is value measured? What general factors are involved? How does each factor affect value?

Answer 1

Value is measured in terms of the present value of cash flows which an investment is expected to produce during its life.

The three general factors which determine value are:

1.Amount of future cash flows

2.Timing of future cash flows

3.Required rate of return of investors

In case the amount of cash flows increases,if cash flows are received in shorter time period or if investors required rate of return decreases or any combination of the above events take place then the investment's value would increase.Thus,each factor affects value.