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Method 1: that’s your typical cash flow discounting. The $100 cash outflow tomorrow is equivalent to $99 today plus the interest it would generate between today and tomorrow.
Method 2: I have tried to work backwards using undiscounted amounts minus opportunity cost which I have called “interests forsaken”. The NPV is then equal to the sum of undiscounted cash outflows and inflows minus the interest forsaken.
Comparing the two methods, I obtain a NPV difference from 1 to 2 and would be grateful to have some guidance on whether my reasoning is wrong or is it due to a modelling mistake. I have summarised the issue in excel but could not attached a file to my post.
Thanks. Read More