Discounted Cash Flow Techniques

DCF techniques for capital budgeting consider both the magnitude and the timing of the cash flows in each period covering the project's  whole life. All the methods are pinned on the cash flows being discounted at a certain rate which may be the "cost of capital" or which may be compared with the "cost of capital ".  "Cost of capital" is the minimum discount rate that must be earned on a project  so as to leave the firms market value unchanged. As said earlier, the NPVand IRR methods are the two main techniques; and BCR, net terminal value and annual equivalent methods are but variations out of these two main techniques. The difference between these two techniques, and very important this difference is  NPV technique depends on the time instant to which the cash flows are discounted (for deny adopted rate of return); but, in the IRR method, once the IRR is evaluated at an instant of time, it is independent of the time instant for its evaluation; i.e. IRR will remain the same for all time instants for a given cash flow stream. For the same reason, additionally, IRR is indifferent to how ambiguous items are considered, viz. items that may qualify to be viewed either as part of benefits or part of costs - i.e. whether an item, depending on the view taken, either adds to the benefit or diminishes the cost; or, alternatively whether an item, adds to the cost or diminishes the benefit. If rebate on income tax is given against payment 01 insurance preemie, the rebate can be taken as an increase in benefit or decrease in cost. If money has to be spent in rehabilitating displaced persons from a project site. it can be considered as a decrease in benefit or an increase in cost.