How to Calculate Rate of Return

摘要

Last month we introduced the concept of discounted cash flow as a formal way of quantifying the fact that a transaction scheduled for some future date does not have the same weight, or value, as a transaction that occurs in the present. Money in hand has value in that it can be used to accrue interest or reduce the cost of debt; future transactions contain an element of risk. We showed how you compound up a transaction when you "move" it from now into the future and how you discount back a transaction to determine its equivalent value when you "move" it from some future date back to the present. We concluded by showing how you discount a series of transactions to determine the net present value (NPV) of the annual cash flows associated with investment alternatives.