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Query on discounting of cash flows
Hi, What is exactly the logic of discounting future cash flows? I understand when future cash inflows are discounted with "expected return". But in one instance I saw Savings in future is discounted with "interest on loan rate"? What is the logic in that?
Replies (2)
It simply means depreciation in value of money i.e. today Rs. 100 are equal to Rs. 110 after 1 year, say. That is why Future CFs are discounted.
We use expected return for the true value of expected income now but the savings are depend upon the market conditions therefore to know the correct market value of savings we use market rate I.e loan rate
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