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...than two or three years.

Definition

Discounted cash flow is primarily method of capital investment appraisal. Central to it is the concept that money paid out in the future is really less costly than money paid out today, and that money received in the future is less valuable than money received today. This is unlike some other investment appraisal methods such as 'payback' and 'return on investment', and most people think that it makes it superior to them. It recognises that there is a value in holding money.

This should be readily apparent. It is why, for example, banks pay interest on money deposited with them and charge interest on money borrowed from them.

Future cash receipts and payments must be discounted to bring them back to present value. The longer the wait before money is received or a payment is made, the bigger the discounting factor that must be applied.

Action checklist

1. Extracts from interest rate tables

Interest rate tables are widely available. The following extracts indicate the principles and will be used in the examples in this checklist.

The interest factors have been rounded...

NOTE: All illustrations and photos have been removed from this article.




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