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What discounted cash flow approach works best when investors are faced with mutually exclusive...

Question:

What discounted cash flow approach works best when investors are faced with mutually exclusive opportunities? Explain.

Discounted Cash flow Methods

Discounted Cash flow Methods use discounted cash flow analysis to tell the viability of the project, asset or company using a common concept in finance, time value of money. Expected future cash flow are determined and discounted to present using the Weighted average cost of capital depending on the capital structure. There are two discounted cash flow methods commonly used,the net present value(NPV) and the Internal rate of return(IRR).

Answer and Explanation:

Net present value discounts the future cash flows to current value. It give the current unit value of the project. IRR computes the rate of return that will make the net present value of the project to be zero. NPV is preferred because for different discount rate it produces a different value while the IRR produces the same results for different discount rate. NPV also takes into account the cost of capital of the project or company.


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