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1) What concept must be considered when looking at cash flows over several years for a long-term investment? Explain
1) What concept must be considered when looking at cash flows over several years for a long-term investment? Explain.
2) What is meant by the term present value?
3. What is the formula used to calculate the present value of a future cash flow? Describe each component.
4. Describe the three steps required to evaluate investments using the net present value method.
Expert Solution
Answer:
1.
The time value of money must be considered while evaluating cash flows over several years for a long-term investment.
A dollar today is more valuable than a dollar a year or more from now. Hence the higher the cash inflows from an investment in the earlier years, the better it is than higher cash inflows during the later years of the investment..
2.The term present value means the worth of 1 rupee today is higher than that of 1 rupee after few years.
3. PV= CF/(1 + r) ^t.
PV-present value
CF-future cash flow
r - discount rate
t- number of years
4. 3 steps required to evaluate investment using npv method:
a) Account the amounts and time intervals of cash flows
b) Decide a rate of return or interest factor
c) Comput npv using the formula
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