CHAPTER 7
Investment Appraisal
Time Value of Money
So what does discounting cash flows (DCF) entail? Why do we consider it to be the gold standard in finance?
We start with a simple example.
I’ve got two propositions for you; which one would you prefer?
A) I either give you $100 now, or
B) I promise to give you $100 in a year’s time.
Which one do you prefer?
It wouldn’t be surprising if you said that you very much preferred the $100 right now.
And that is indeed what most people would intuitively reply. They prefer money in hand rather than to wait for the same amount of money at some point in the future.
But why is that?
Why is the $100 today somehow valued differently from $100 in the future?
Well, we have at least three good reasons why ...
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