Question

Two methods of capital investment analysis that incorporate the time value of money are:______.

Answer 1

Two methods of capital investment analysis that incorporate the time value of money are -Net Present Value and Discounted Cash Flow

1- Net Present Value

Net Present Value reduces the expected future cash flows by a specific rate to arrive at their value in today's terms. After subtracting the initial investment cost from the present value of the expected cash flows, it can be  determined whether the project is worth pursuing. If the NPV is a positive number, it means it's worth pursuing while a negative NPV means the future cash flows aren't generating enough return to be worth it and cover the initial investment.

2- Discounted Cash Flow

With DCF analysis, the discount rate is typically the rate of return that's considered risk-free and represents the alternative investment of the project. The present value is the value of the expected cash flows in today's dollars by discounting or subtracting the discount rate. If the result or present value of the cash flows is greater than the rate of return from the discount rate, the investment is worth pursuing.

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