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The Time Value of Money and Diiscount Rates

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Please explain how the Time Value of Money (TVM) is used in Capital Budgeting and how TVM concepts assist a company in making capital budgeting decisions. Should the company use the same discount rate for all projects? If not, what factors would determine the differences in the discount rates used?

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Solution Summary

This solution describes the role played by the Time Value of Money in capital budgeting decisions, as well as the appropriate discount rate to use for different projects.

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The Time Value of Money recognizes that each dollar spent by an entity carries a cost. If the firm can earn more from a project than the financing for that project costs, the firm will increase in value, which directly affects the stock price and, by extension, the shareholders' wealth. Therefore, if the firm discounts the benefits (such as free ...

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