Investment risk
Investment risk

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Investment risk

4 Discounted cash flow and the net present value rule

4.1 Introduction

This section looks at how discounted cash flow (DCF) and the net present value (NPV) rule help investors to choose between possible alternative investments and decide whether the return offered on an investment is worth it, given the risk.

  • DCF allows us to compare two alternative investments with different expected cash flows, different maturities and different risks.

  • NPV allows us to decide whether or not to go ahead in either case.

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