Demerits of discount cash flow method
The following are the demerits of discounted cash flow method.
(1) The method is difficult to understand and work out as compared to other method of ranking capital investment proposals.
(2) The method takes into account only the cash inflows on account of a capital investment decision. As a matter of fact, the profitability or other wise of a capital proposal can be judged. Only when the net income (and not the cash inflow) on account of operations is considered.
(3) The method is based on the presumption that cash inflow can be invested at the discounting rate in the new projects. However, this presumption does not always hold goods because it all depends upon the available investment opportunities.
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