Discounted Cash Flow - Discounted Cash Flow The discounted...

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Discounted Cash Flow The discounted cash flow technique is generally recognized as the best conceptual approach to making capital budgeting decisions. This technique considers both the estimated total net cash flows from the investment and the time value of money. The expected total net cash flow consists of the sum of the annual net cash flows plus the estimated liquidation proceeds when the asset is sold for salvage at the end of its useful life. But because liquidation proceeds are generally immaterial, we ignore them in subsequent discussions. Two methods are used with the discounted cash flow technique: (1) net present value, and (2) internal rate of return. Before we discuss the methods, we recommend that you examine Appendix C if you need a review of present value concepts. Net Present Value Method The net present value (NPV) method involves discounting net cash flows to their present value and then comparing that present value with the capital outlay required by the investment. The
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