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Hello.
Please explain how many investment appraisal techniques do we come across in paper FM and in future papers?
Secondly, how many techniques are discounted cash flow and non-discounted cash flow? And what are there differences?
Thirdly, please explain me what are the concepts of present value and future value and why are they used, how they work?
Thank you
In FM – Payback, Disc Payback, ARR, IRR, NPV, ROCE,
Then you also do Lease v Buy, Asset Replacement and Capital RationingIn later papers, like AFM you will learn more.
Watch our lectures on this topic so you get more understanding on what is examined in FM
DCF techniques take into account the time value of money by discounting future cash flows, while non-discounted cash flow techniques do not consider the time value of money.
The main difference between discounted cash flow and non-discounted cash flow techniques lies in the treatment of future cash flows. DCF techniques assign a lower value to future cash flows compared to non-discounted cash flow techniques. This is because DCF techniques recognise that money received in the future is worth less than money received today due to factors such as inflation and the opportunity cost of capital. Whilst, non-discounted cash flow techniques, treat all cash flows equally regardless of their timing. They do not adjust for the time value of money and assume that a dollar received in the future has the same value as a dollar received today.Watch our lectures on this topic so you get more understanding
Present value (PV) is the current value of a future cash flow or a series of future cash flows, discounted at a specified rate. It represents the amount of money that would need to be invested today to achieve the same future cash flow.
Future value (FV), on the other hand, is the value of an investment or cash flow at a future point in time, given a specified interest rate or rate of return.
These concepts are used in investment appraisal to determine the profitability and viability of investment projects.
By discounting future cash flows to their present value, decision-makers can assess whether the expected returns from an investment outweigh the initial cost. Similarly, by calculating the future value of an investment, decision-makers can evaluate the potential growth and accumulation of wealth over time.
Watch our lectures on this topic so you get more understanding
Many Many Thanks to You… 😉
Please help me grasp this too.
In FM we learn – Payback, Disc Payback, ARR, IRR, NPV, ROCE,
Then we also learn Lease v Buy, Asset Replacement and Capital Rationing.My question is that ALL these investment appraisal techniques as you mentioned are used in present value for investment purpose (as investment cases) but the only case where we use present value for borrowing is in the case of Lease v Buy chapter, is that ? CORRECT?
Secondly, do we also learn any chapter where future value is examined because all the techniques you have stated are used within present value scenarios?
Thirdly, please explain why the present value factors define because the factor of 10% after one-year is 0.909 (9.09%) and 0.826 and so on but what precisely is causing this interest rate to reduce over time?
Is it correct that it is caused by inflation and opportunity cost of capital which states that money has a potential to earn interest if deposited (or used for investment) but if not used then investor is literally losing the potential income?
Yes, in the case of the Lease vs Buy chapter, the present value is used for borrowing. In this scenario, the net cash flows are discounted at the post-tax cost of borrowing to determine the net present value (NPV) of each option. The option with the lower NPV is chosen as the more cost-effective choice.
Present value is critical you have to deal with relatively advanced NPV calculations which may include problems such as inflation, taxation, working capital and relevant/irrelevant cash flows
You only include relevant cash flows in an NPV …..So no depreciation and no interest for example
The factors are saying you have money to pay as a Wacc or in simple terms interest … this means that for every $1 we generate as a cashflow it is only with 0.909 to us in year 1 terms, 0.826 in year 2 terms and so on.
So we don’t ignore the cost of finance!
The purpose of DCF analysis is to estimate the money an investor would receive from an investment, adjusted for the time value of money.The concept of future value is often closely tied to the concept of present value. Whereas future value calculations attempt to figure out the value of something in the future, present value attempts to figure out what something in the future will be worth today.
Future Value: $1,000 * (1 + 10%)^1 = $1,100
The future value formula could be reversed to determine how much something in the future is worth today. In other words, assuming the same investment assumptions, $1,100 has the present value of $1,000 today.Present Value: $1,100 / (1 + 10%)^1 = $1,000
Therefore, by changing directions, future value can derive present value and vice versa. The future value of $1,000 one year from now invested at 10% is $1,100, and the present value of $1,100 one year from now assuming 10% interest is earned is $1,000.
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