Question

• Give an example of a situation where a building contractor may want to use the discounted cash flow (DCF) analysis method.

Answer 1

A building contractor may have two options, to build a commercial complex or a reidential one. In both the cases, he will need to estimate his cost of capital and the future cash flows from both the options. Suppose the commercial complex will give future cash flows for 20 years while the residential one will only give cash flows for 5 years. He should then discount the cash flows and calculate the present value of future cash flows to make the final decision.