Minimum discounted cash flow rate

Check the values given for the discounted-cash-flow rate of return and net present worth. If the company requires a minimum rate of return of 10 percent, which system should be chosen ... 

Specify the discount rate, or minimum attractive rate of return (MARR) used to discount cash flows to a comiiion time basis. Discounting recognizes that revenues and costs incurred at different times m the future are generally not valued equally to revenues and costs occurring in the... 

The critical element of the strategy for accounting for inflation in design estimates is to present the results in the form of present worth (present value, profitability index, discounted cash flow) with all future dollars discounted to the value of the present dollar at zero time. The discount factor must include both the interest required by the company as minimum return and the estimated interest rate of inflation. If profits on which income taxes are charged are involved, then the present worth based on the after-tax situation should be used. 

To calculate the net present value (NPV) of an investment, a firm s accounting department estimates the firm s minimum desired rate of return. This is used to discount the cash flows above. For the cash flow example above, if we assume that the minimum desired rate of return for that firm is 10%, then the cash flow for each period is multiplied by the present value of a dollar for that period (i.e., P = S/(l -F r)° where S = 1, r is the interest rate or the desired rate of return, and n is the number of periods in the future) to find the present value of that cash flow. This is shown in Table 3.2. 

For the discounted payback period and the net present value calculations, the question arises as to what interest rate should be used to discount the cash flows. This internal interest rate is usually determined by corporate management and represents the minimum acceptable rate of return that the conpany will accept for any new investment. Many factors influence the determination of this discount interest rate, and for our purposes, we will assume that it is always givem... 

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