A Brief Note On Cash Flow

1275 WordsJan 14, 20166 Pages
2.1.2 Discounted Cash Flow: Discounted cash flow methods are other popular types of capital budgeting besides the Net present value (NPV). Discounted cash flow (DCF) is a common valuation method to evaluate investment opportunities and includes two basic tecnhiques: internal rate of return (IRR) and Profitability index (PI)or benefit-cost ratio (Shapiro, 2005). Since this research focuses Profitability index for evaluating the investment opportunity, the following section would highlight on PI. Profitability Index: The Profitability index (PI) also commonly refered to as benefit-cost ration is the ratio of discounted profits over the discounted costs. It is generally the estimation of profitability of an investment and could be…show more content…
Although both NPV and PI yields came decision, they at times disagree in the ranking orders of the acceptable projects (Shapiro, 2005). Over the time, many researchers have criticised Distcounted cash flow analysis for till now every DCF analysis treats a project’s expected cash flows as given at the beginning. This leads to undertake that all operating decisions are set in advance. However, in reality, the opportunity to make decisions based on information to become readily available in the future is an essential features of many investment choices and decisions. Several research have been conducted related to use of NPV in various fields of study and business. Wikner (1994), had undertaken some study of applying the NPV to a systems dynamics model of a production and inventory control system. Likewise, in 2004, Naim et al, had presented that the standard NPV is not a sufficient criterion for analysing the dynamic behaviour of a closed-loop form of system and established a need to extend the NPV criterion to expand costs associated with the variances that occur in the system variables (Naim, 2006). Likewise in the paper “Reasoning the ‘net-present-value’ way: Some biases and how to use psychology for falsifying decision models”, the author stresses that eventhough the Net Present Value methodology,is widely acceptable tool for investment decisions in economics, it exhibits
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