corporate finance

Running Head : Present Value

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The importance of present value in corporate finance

Present value is the equivalent value of a future cash flow today . The concept is vital in corporate finance which is a field that deals with making decisions on the most viable project to undertake for corporations . Since resources are always few and scarce , the projects undertaken must enhance the core objective of the existence of the corporation . This is achieved by undertaking projects with the highest net present value

. The accountant starts by selecting all projects with positive net present value , then choosing the project with the highest positive value . Cash flows for the future are projected then discounted to determine the present value . The investment outlay equals the net present value . The discounting rate greatly influences the NPV hence care must be taken in determining the discounting rate to use (Warren , Reeves , 2001

The discounting rate should reflect the risk-ness of the investment and also the financial mix should be taken into account . There are different models for estimating the discounting rate like the capital asset pricing model (CAPM ) and weighted average cost of capital (WACC . To get the financial mix , the other discounting techniques include payback period , internal rate returns (IRR , modified IRR , equivalent annuity capital efficiency and return on investment (ROI . Due to setbacks in the process of forecasting , analyst will have to perform sensitivity analysis to assess the projects sensitivity...