Please assist. Thank you! A consultant commented that \"too often the numbers lo
ID: 2488454 • Letter: P
Question
Please assist. Thank you!
A consultant commented that "too often the numbers look good but feel bad." This comment often stems from estimation error common to capital budgeting proposals that relate to future cash flows. Three reasons for this error often exist. First, reliably predicting cash flows several years into the future is very difficult. Second, the present value of cash flows many years into the future (say, beyond 10 years) is often very small. Third, it is difficult for personal biases and expectations not to unduly influence present value computations. Compute the present value of $100 to be received in 10 years assuming a 12% discount rate. Why is understanding the three reasons mentioned for estimation errors important when evaluating investment projects? Link this response to your answer for part 1.Explanation / Answer
1) Present value of $100 to be received in 10 years @ 12% discount rate = $100 * PVIF@12%,10 year
= $100 * 0.322 = $32.2
2) The value of $100 is not equals to the $100 received in future (ie after 10 years) or the value of $100 to be received in future (after 10 years) is not equals to the $100 of today. It is because of the Time value of money. Hence where ever the implication of future cash inflows or future cash outflows there Time value of money is to be considered.