Use Discounted Cash Flow Models to Make Capital Investment Decisions
Completion requirements
If you have more than one investment opportunity but can only afford one, which one will you choose? You are presented with a chance to acquire new equipment that can improve your operating efficiency and help you to increase your sales, but is it worth the cost? After reading the material in this section, you will be able to calculate the value of an investment using discounted cash flows.
Use Discounted Cash Flow Models to Make Capital Investment Decisions
Fundamentals of the Discounted Cash Flow Model
The discount cash flow model assigns a value to a business opportunity using time-value measurement tools. The model considers future cash flows of the project, discounts them back to present
time, and compares the outcome to an expected rate of return. If the outcome exceeds the expected rate of return and initial investment cost, the company would consider the investment. If the outcome does not exceed the expected rate of return or the
initial investment, the company may not consider investment. When considering the discounted cash flow process, the time value of money plays a major role.