Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting

The vast majority of corporate finance textbooks presents the problem of investment decisions considering discrete cash flows at the end of each period. However, on several occasions, this assumption does not fit the facts, as in the case of the revenues of large retailers, which tend to be generate...

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Detalles Bibliográficos
Autores: Cavalcante, Luiz Ricardo, Rocha, Carlos Henrique
Tipo de recurso: artículo
Estado:Versión publicada
Fecha de publicación:2018
País:Brasil
Institución:Centro Universitário de Belo Horizonte (UNIBH)
Repositorio:Revista e-xacta
Idioma:portugués
OAI Identifier:oai:ojs.periodicos.uninove.br:article/8143
Acceso en línea:https://periodicos.uninove.br/exacta/article/view/8143
Access Level:acceso abierto
Palabra clave:Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
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spelling Investment Appraisal and the Choice between Continuous and Discrete Cash Flow DiscountingInvestment Appraisal and the Choice between Continuous and Discrete Cash Flow DiscountingPresent valueContinuous and discrete cash flowsDistribution of continuous cash flowsInvestment appraisal.Present valueContinuous and discrete cash flowsDistribution of continuous cash flowsInvestment appraisal.The vast majority of corporate finance textbooks presents the problem of investment decisions considering discrete cash flows at the end of each period. However, on several occasions, this assumption does not fit the facts, as in the case of the revenues of large retailers, which tend to be generated almost continuously, instead of at the end of each year. In this paper, we compare the net present value of a typical investment considering both a discrete distribution of expected cash flows and a continuous one. We show that the differences observed depend upon the behavior of the function that describes the cash flows and upon the capital cost used to discount the values. Differences tend to be higher if higher capital costs are used. As a result, riskier projects are more sensitive to the right choice of the cash flow distribution to be used in its appraisal and no method can be considered, a priori, better than the other, as operational, fiscal and accounting aspects may make continuous or discrete cash flows more appropriate to describe practical realities. Thus, the article contributes to better supporting investment decisions and to enriching teaching material addressing the subject of investment decisions.The vast majority of corporate finance textbooks presents the problem of investment decisions considering discrete cash flows at the end of each period. However, on several occasions, this assumption does not fit the facts, as in the case of the revenues of large retailers, which tend to be generated almost continuously, instead of at the end of each year. In this paper, we compare the net present value of a typical investment considering both a discrete distribution of expected cash flows and a continuous one. We show that the differences observed depend upon the behavior of the function that describes the cash flows and upon the capital cost used to discount the values. Differences tend to be higher if higher capital costs are used. As a result, riskier projects are more sensitive to the right choice of the cash flow distribution to be used in its appraisal and no method can be considered, a priori, better than the other, as operational, fiscal and accounting aspects may make continuous or discrete cash flows more appropriate to describe practical realities. Thus, the article contributes to better supporting investment decisions and to enriching teaching material addressing the subject of investment decisions.Universidade Nove de Julho - UNINOVE2018-12-18info:eu-repo/semantics/articleinfo:eu-repo/semantics/publishedVersionapplication/pdfhttps://periodicos.uninove.br/exacta/article/view/814310.5585/exactaep.v16n4.8143Exacta; v. 16 n. 4 (2018): (Out-Dez); 125-1341983-93081678-5428reponame:Revista e-xactainstname:Centro Universitário de Belo Horizonte (UNIBH)instacron:UNIBHporhttps://periodicos.uninove.br/exacta/article/view/8143/5196info:eu-repo/semantics/openAccessCavalcante, Luiz RicardoRocha, Carlos Henrique2020-07-07T21:44:51Zoai:ojs.periodicos.uninove.br:article/8143Revistahttps://revistas.unibh.br/dcet/PUBhttps://revistas.unibh.br/dcet/oaiexacta@unibh.br||periodicosdeminas@gmail.com1984-31511984-3151opendoar:2020-07-07T21:44:51Revista e-xacta - Centro Universitário de Belo Horizonte (UNIBH)false
dc.title.none.fl_str_mv Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
title Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
spellingShingle Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
Cavalcante, Luiz Ricardo
Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
title_short Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
title_full Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
title_fullStr Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
title_full_unstemmed Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
title_sort Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting
dc.creator.none.fl_str_mv Cavalcante, Luiz Ricardo
Rocha, Carlos Henrique
author Cavalcante, Luiz Ricardo
author_facet Cavalcante, Luiz Ricardo
Rocha, Carlos Henrique
author_role author
author2 Rocha, Carlos Henrique
author2_role author
dc.subject.por.fl_str_mv Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
topic Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
Present value
Continuous and discrete cash flows
Distribution of continuous cash flows
Investment appraisal.
description The vast majority of corporate finance textbooks presents the problem of investment decisions considering discrete cash flows at the end of each period. However, on several occasions, this assumption does not fit the facts, as in the case of the revenues of large retailers, which tend to be generated almost continuously, instead of at the end of each year. In this paper, we compare the net present value of a typical investment considering both a discrete distribution of expected cash flows and a continuous one. We show that the differences observed depend upon the behavior of the function that describes the cash flows and upon the capital cost used to discount the values. Differences tend to be higher if higher capital costs are used. As a result, riskier projects are more sensitive to the right choice of the cash flow distribution to be used in its appraisal and no method can be considered, a priori, better than the other, as operational, fiscal and accounting aspects may make continuous or discrete cash flows more appropriate to describe practical realities. Thus, the article contributes to better supporting investment decisions and to enriching teaching material addressing the subject of investment decisions.
publishDate 2018
dc.date.none.fl_str_mv 2018-12-18
dc.type.driver.fl_str_mv info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
format article
status_str publishedVersion
dc.identifier.uri.fl_str_mv https://periodicos.uninove.br/exacta/article/view/8143
10.5585/exactaep.v16n4.8143
url https://periodicos.uninove.br/exacta/article/view/8143
identifier_str_mv 10.5585/exactaep.v16n4.8143
dc.language.iso.fl_str_mv por
language por
dc.relation.none.fl_str_mv https://periodicos.uninove.br/exacta/article/view/8143/5196
dc.rights.driver.fl_str_mv info:eu-repo/semantics/openAccess
eu_rights_str_mv openAccess
dc.format.none.fl_str_mv application/pdf
dc.publisher.none.fl_str_mv Universidade Nove de Julho - UNINOVE
publisher.none.fl_str_mv Universidade Nove de Julho - UNINOVE
dc.source.none.fl_str_mv Exacta; v. 16 n. 4 (2018): (Out-Dez); 125-134
1983-9308
1678-5428
reponame:Revista e-xacta
instname:Centro Universitário de Belo Horizonte (UNIBH)
instacron:UNIBH
instname_str Centro Universitário de Belo Horizonte (UNIBH)
instacron_str UNIBH
institution UNIBH
reponame_str Revista e-xacta
collection Revista e-xacta
repository.name.fl_str_mv Revista e-xacta - Centro Universitário de Belo Horizonte (UNIBH)
repository.mail.fl_str_mv exacta@unibh.br||periodicosdeminas@gmail.com
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