What are the different terms for the discount rate? What does it represent and w

Question

What are the different terms for the discount rate? What does it represent and why is it used to discount cash flows when valuing projects?

What is a cash flow and how is it constructed? How are they different from earnings?

What is the principal of incremental cash flows and why is it important?

What is the sunk cost fallacy? Do sunk costs affect incremental cash flows? What is the marginal cost of using an asset that has already been purchased?

How should we account for project value and cash flows that occur after the forecast horizon? When are the different methods appropriate?

Explanation / Answer

1.

Discount rate is the rate at future future cash flow is discounted to determine present value of future cash flow. for discount rate we use different term like, required rate of return, cost of capital, WACC. we use discount rate to determine present value of future cash flow. the investment made in project at at present time and because of time value of money, dollar value today is higher than dollar value in future.

So, we use discount rate to determine future dollar value in term of present dollar value. in this way dollar value of at time of investment si equal to dollar value in future. So, to evaluate the accpetibility of project we use discount rate to determine present value of future cash flow.

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