The $100 will be worth $121 in two years at an interest rate of 10%. ![]() What is the value of the investment after two years if the interest rate is 10%? ![]() To compound a sum, the figure is increased by the amount of interest it would earn over the period.Īn investment of $100 is to be made today. Compounding calculates the future or terminal value of a given sum invested today for a number of years. These are:ĭiscounted cash flow (DCF) techniques take account of this time value of money when appraising investments.Ī sum invested today will earn interest. Cash flows and relevant costsįor all methods of investment appraisal, with the exception of ROCE, only relevant cash flows should be considered. Alternatively, companies could use discounted cash flow techniques discussed on this page, such as Net Present Value (NPV) and Internal Rate of Return (IRR). When appraising capital projects, basic techniques such as ROCE and Payback could be used. 1.5.4 Difficulties with the IRR approach.1.5.3 Advantages and disadvantages of IRR.1.5.1 Calculating the IRR using linear interpolation.1.4.4 Advanced and delayed annuities and perpetuities.1.3.4 Advantages and disadvantages of using NPV.1.3.2 Assumptions in calculating the net present value.
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