Economics, Econometrics and Finance
4 years ago

Discounted cash flows model challenges traditional capital budgeting decisions

Pressacademia
Revisiting discounted cash flows model as a capital budgeting decision tool
Suat Teker

Paper Summary

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The discounted cash flows model, often used for making financial decisions, has some limitations. Factors like cash flows, time period, risk, and discount rate can be tricky to estimate accurately. The model assumes certain conditions that may not always match real-life situations. The length of a project's economic life, the discount rate calculation, and the estimation of cash flows are crucial but challenging aspects. Adjusting for risks and considering international investments can complicate things further. Real options can add value to the analysis. In conclusion, using the discounted cash flows model for capital budgeting requires expertise and attention to detail, and should align with a company's overall strategic goals.