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Many thanks for your devotion.
My question, however, is on discounted cash flows where you said, “Discounted cash flows is by far the most important of all.”
Apart from the fact that it can be used to assess or compare different investments, what advantages again does it have over the others that makes it the most important of all?
Thank you.
Discounted cash flows DCF takes into account the time value of money, which means it considers that money has a higher value in the present than in the future due to factors like inflation.
Therefore providing a more realistic appraisal of the investment’s profitability.It allows for the incorporation of the cost of capital and risk factors. By discounting cash flows, the cost of capital can be factored in, ensuring that the investment’s returns are compared to the required rate of return. This helps in assessing the risk associated with the investment and making informed decisions.
Also it enables comparison of different projects with varying cash flows and investment amounts. By converting all cash flows to their present value, DCF provides a common basis for evaluating investments, regardless of their size or duration
This all makes it the most important method of investment appraisal.
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