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Discounting and investment appraisal

Time value of money

1.1 Introduction

Money received today is worth more than the same amount received in
the future, i.e. it has a time value.

Discounted cash flow techniques take account of this time value of
money when appraising investments.

1.2 Why money has a time value

 Cost of finance

 Investment opportunities

 Inflation

 Risk

1.3 Discount rates

 Time value of money expressed as an interest rate, also known as a “discount
rate”, a “cost of capital” and/or a “required return”

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