search query: @indexterm NET PRESENT VALUE / total: 71
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| Author: | Smith, G. N. |
| Title: | Nominal and real required returns in present value analysis. |
| Journal: | Engineering Economist
1988 : SUMMER, VOL. 33:4, p. 331-348 |
| Index terms: | NET PRESENT VALUE INVESTMENT ANALYSIS CAPITAL INVESTMENT CASH FLOW |
| Language: | eng |
| Abstract: | Present Value Analysis (PVA) is complicated by uncertainty about future inflation. If real cash flows do not depend on inflation and real required returns are close to zero, than hypothetically both of them can be omitted from PVA. Unfortunately, they cannot. It is shown that real cash flows are typically sensitive to inflation and that, outside the 1950s and 1960s, real interest rates have not been very stable or close to zero. Consequently a neglect of them would have caused substantial present-value errors. An engineering project normally commands a substantial risk premium. The neglect of it can cause a large overestimate of a project's present value. |
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