Discounted Cash Flow & Net Present Value

Question 1

Advantaged of DCC and NPV

Answer 1

Allows for future earnings to be adjusted to present values

Easy to compare different projects

Allows for impact of inflation on value of future cash flows

Discounts can be changed to take into account changes in the economic and financial climate

Allows for effect of risk on estimated future cash flows

Question 2

Disadvantages of DCC and NPV

Answer 2

It is difficult to calculate

Discount factors could be incorrect which makes the NPV inaccurate

Difficult to set discount factors far into the future, the longer into the future we go, the less reliable the discount factor