After reading Chapter 7, with some examples, why are discounted cash flow techniques considered the backbone of modern finance?

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Collen VonLv2

21 Jan 2019

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Discounted cash flow techniques are capital budgeting techniques that take into account both the time value of money and the estimated net cash flow from an investment. These techniques take into account the fact that cash flows that occur early in the life of an investment will be worth more than those that occur later. The primary discounted cash flow technique is called net present value. Describe this method in 75 words. How is the NPV calculated and what is the decision rule?

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Given that there are a minimum two ways to calculate the time value of money â discounted and non-discounted cash flow analysis, isn't it better to analyze projects requiring a large investment in capital assets using the discounted cash flow analysis rather than non-discounted cash flow analysis?

Why, or why not? Please explain in one to two paragraphs.

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You are the manager of a construction company with a five-yearproject that has a projected net cash flow of $25,000, $35,000,$45,000, $20,000 and $15,000. Implementation costs are $50,000. Thecompany has a required rate of return of 20%. Compute thediscounted cash flow and determine the NPV. Include yourcalculations in an appendix after the references page. Includeinformation on what projected net cash flow, discounted cash flowand NPV are, why they are useful in project selection, and, giventhe numbers, if this example project meets the companyrequirements, and why or why not.