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Capital budgeting

2.6 Present value tables

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The discount factor, (1 + r ) can be looked up in present value tables.
On the present value table, look along the top row for the interest rate and down the
columns for the number of years, where the two intersect you can read off the
discount factor.

2.7 Interest rates

In the above calculations we have referred to the rate of interest (r). There are a
number of alternative terms used to refer to the rate an organisation should use to
take account of the time value of money:

 Cost of capital

 Discount rate

 Required return

Whatever term is used, the rate of interest used for discounting reflects the cost of
the finance that will be tied up in the investment.

Illustrations and further practice

Now try TYU questions 5 and 6 from Chapter 14

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