COMMERCE 2FA3 Chapter Notes - Chapter 2: Net Present Value
15 Apr 2015
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Comm 2fa3 - chapter 2 notes: money has time value, therefore it is better to receive today then it is later in the future. Discount (back) a future cash flow: required return on equity: the discount rate used for the cash flows of a risky stock, cost of capital: discount rate used for capital budgeting purposes, k = discount rate, discount rates allows comparison of future sums of cash with present sums of cash (allows future values to be transformed into present for comparison. If periods are of different length (e. g. 1 month), discount rate should be the effective rate over that length of time (e. g. 1 month: assumptions here are that: the rate used is not subject to any compounding more often than once per period (year), cashflows are paid and received at the end of these periods (year) and finally the discount rate is identical for all future periods (years)
