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1. Businesses need to invest cash in order to receive a return on investment for future...

1. Businesses need to invest cash in order to receive a return on investment for future cash flows. What tool(s) are used to analyze investment decisions made?

2. What is a discounted cash flow and why is it used?

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Answer #1

1 The business uses capital budgeting techniques to analyse capital Investments. The various techniques used in capital budgeting are internal rate of return method, discounted payback method payback period method and net present value method which is the most popular. Under the net present value method the future cash flows of a project are discounted to arrive at the net present value generated from a particular investment and then the decision is made.

2. Discounted cash flow refers to deriving the present value of future cash flows. This is done because the present value of a particular amount is higher than its future value. Money received today is more valuable than money received in the future.

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