Discounted Cash Flow Alternatives
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Discounted Cash Flow Alternatives
There are a number of different approaches that can be used to evaluate whether a company should approve a particular project. Each method has specific advantages and disadvantages, and certain scenarios could benefit from the use of a particular method. Consider your professional experience and knowledge gained from the readings as you answer the following Discussion question:
What are the alternatives to discounted cash flows? Evaluate the advantages and disadvantages of each alternative. Using an example from your professional experience, choose one method and discuss a scenario in which you would use this method. Explain your choice.
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The discounted cash flow alternatives are examined.
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Discounted Cash Flow Alternatives
As companies continue or expand their operations, they are faced with possible capital budgeting projects that are to be evaluated to ensure that they meet the management's acceptance criteria as to profitability, payback, and other critical concerns.
Among the techniques used in evaluating the feasibility of capital-budgeting projects are those that are categorized as discounted cash flow methods or alternatives. They are named to be such because they make use future cash flows that are discounted to the present as a variable in the evaluation. This indicates that the discounted cash flow (DCF) methods take into account the time value of money. Future cash flows are computed in terms of their present values in order to make them comparable to the initial investment which is already in its present value.
The following are the DCF methods:
1. Discounted payback period approach
Just like the simple payback method, this approach shows the number of years (the period) to recover an initial cash outlay. The only difference is that the discounted payback approach makes use of discounted cash flows or cash flows that were computed in their present values.
The advantage of this over the simple payback period is that it takes into account the time value of money which is the assumption that a $1 received today is greater in value that ...
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