Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting

Autores

  • Luiz Ricardo Cavalcante Senado Federal
  • Carlos Henrique Rocha Faculdade de Administração, Contabilidade e Economia (FACE) da UnB. Departamento de Ciências Contábeis e Atuarias (CCA). Professor Associado III.

DOI:

https://doi.org/10.5585/exactaep.v16n4.8143

Palavras-chave:

Present value, Continuous and discrete cash flows, Distribution of continuous cash flows, Investment appraisal.

Resumo

The vast majority of corporate finance textbooks presents the problem of investment decisions considering discrete cash flows at the end of each period. However, on several occasions, this assumption does not fit the facts, as in the case of the revenues of large retailers, which tend to be generated almost continuously, instead of at the end of each year. In this paper, we compare the net present value of a typical investment considering both a discrete distribution of expected cash flows and a continuous one. We show that the differences observed depend upon the behavior of the function that describes the cash flows and upon the capital cost used to discount the values. Differences tend to be higher if higher capital costs are used. As a result, riskier projects are more sensitive to the right choice of the cash flow distribution to be used in its appraisal and no method can be considered, a priori, better than the other, as operational, fiscal and accounting aspects may make continuous or discrete cash flows more appropriate to describe practical realities. Thus, the article contributes to better supporting investment decisions and to enriching teaching material addressing the subject of investment decisions.

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Biografia do Autor

Luiz Ricardo Cavalcante, Senado Federal

Dr. em Administração de Empresas

Consultor do Senado Federal

Professor no Instituto Brasiliense de Administração

Carlos Henrique Rocha, Faculdade de Administração, Contabilidade e Economia (FACE) da UnB. Departamento de Ciências Contábeis e Atuarias (CCA). Professor Associado III.

PhD em Economia

Professor Associado II

Departamento de Engenharia de Produção

Universidade de Brasília

Pesquisador de Produtividade CNPq

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Publicado

18.12.2018

Como Citar

Cavalcante, L. R., & Rocha, C. H. (2018). Investment Appraisal and the Choice between Continuous and Discrete Cash Flow Discounting. Exacta, 16(4), 125–134. https://doi.org/10.5585/exactaep.v16n4.8143

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