Discounted Cash Flow Applications
NPV (Net Present value) decision rule
IRR (Internal Rate of return) rule
Opportunity cost is the cost of losing out or giving up on one investment avenue to invest in another avenue, i.e., if I have limited funds and I can invest in either government bonds at 6% or invest in a project, and I choose to invest in the project then in that case I cannot invest in the government bonds and have to give up the chance of earning 6% interest on them. This becomes my opportunity cost. So when I invest in the project I expect to earn a minimum return of 6%.
Money weighted and Time weighted rate of return: