Question

Which TWO of the following best describe the use and characteristics of discounted cash flow methodology?

I.DCF methodology evaluates the profitability of an investment by assigning a present value to future cash flows.II.DCF methodology is a means of receiving a discount so that outgoing cash flows are reduced.III.DCF methodology can only be used on equity securities like common stock.IV.DCF methodology can be used to evaluate and compare fixed-income securities.

Answer 1

The correct answer is option 1 and 4.

Step-by-step explanation:

Discounted Cash Flow Methodology attempts to assign present values to an investment's expected future cash flows. It is an effective way to evaluate and compare various investment options to one another. As fixed-income securities have fixed interest payments, DCF is an effective way to compare fixed-income securities. It is also used to calculate the current market values of these securities.

The project with positive NPV is accepted or higher NPV means the project is more lucrative.