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Sir one of the reservation you mentioned was that “we assume that operating cash flows occurs at the end of each period”
Would there be any difference if we assume cashflow to be evenly spread during the period.
I found it a bit perplexing.Edit: Sir I re-watched the lectures and therein you told that the discounting would change if the assumption change…
But can you pls let me know that if we assume cashflow at end of period would the total interest be more than if have done it without assumption…
If it is true aren’t we overestimating the interest??
When we discount we are always discounting for whole years. Assuming that operating flows are at the ends of years means that we assume that the flow in the first year occurs in 1 years time and so we discount for 1 year.
If (as is more likely in real life) the cash flows were occurring throughout the year then we would have to discount on a day-by-day basis. This would indeed mean that we would be accounting for less interest and the NPV as a result would be higher.
In the exam (and in real life) we only discount on a yearly basis. If the NPV is positive, then we say the project would be worthwhile and we have looked at the ‘worst case’ it can only actually be better.
That is a sensible approach anyway given that the NPV itself is never more than an estimate given that all of the flows used in the calculations are only estimates and could turn out to be completely different.
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