can you please give example and explanation about opportunities cost, discount cash flow, discount rates ,prescent value,...

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Finance

can you please give example and explanation aboutopportunities cost, discount cash flow, discount rates ,prescentvalue, free cash flow, NPV, IRR , stock valuation in financemanagement.

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Hihave tried to explain the terminologies that you have asked in a very simple and precise way Hope this helpsHave invested a lot of time in preparing this answer 1 Opportunities Cost Resources are limited and scarce Financial resources have to be judiciously used for wealth maximizationIf a company has lets say a land and it can use the land for a project which can give a return of 8 then this would be the opportunity cost if it doesnot use the land and it is idle Simply put opportunity to use any financial asset Land Cashetc to generate return would be a cost if it is not used 2 Discounted Cash Flow Discounted Cash flow TechniqueDCF helps to compute the intrinsic value of an asset which is the Present Value of the future cash flows discounted at the required Rate of Return IVC11r1C21r2C31r3 Example A project involves an initial investment of 250000It has a life of 5 yearsThe net cash flow expected to be generated from this project are shown below Year 1 2 3 4 5 Net cash flow 45000 80000 70000 100000 80000 The risk adjusted Nominal rate of return required from the project is 15 Year Nominal Cash Flow Present Value 15 1 45000 450001015139130 2 80000 800001015260491 3 70000 700001015346026 4 100000 1000001015457175 5 80000 800001015539774 Total Cash Inflow at the end of 5 year242596 3Discount Rate A Dollar today is more precious than a Dollar a year from now Money that you hold today is worth more because you can invest it and earn interest After all you should receive some compensation for foregoing spending It is very important to understand the required rate of return in all investment decisionsThis is called a discount ratePrimarily it has three components Risk Free Real Rate of Return The rate of return required for the sacrifice of present consumption It should be used as the discount rate if the cash flows are certain Inflation Premium Purchasing power of money comes down due to rise in inflation When people have more spending power and funds are available at cheaper rates Inflation goes up Hence the lender tends to lose the value of his money for which he will charge inflation premium to compensate for the loss of purchasing power Risk Premium Credit default risk market risk country riskIn certain cases liquidity risk etc are some types of risk which a lender would like to cover before lending for which he will charge Risk premium as an reward for taking these additional risk The three components mentioned above can be combined together in an additive or multiplicative model depending on the scenario and case studyThis discount rate is also called as hurdle rate ie the minimum you would want in return for investing your funds after factoring in the above components 4Present Value Present See Answer

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