Present Value Calculation

After the expected cash flows have been converted into certainty equivalents, the second step under this approach is to calculate their present values. The rate of discount used for the purpose is the risk-free rate or the rate which appropriately reflects the time value of money. It is the same discount rate which is used for computing the present values in the normal course of evaluating capital expenditure. This rate differs from the rate used in the risk-adjusted discount method in that the latter is a modified version of the former.

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