APPENDIX A
The Time Value of Money
Chapter 5 explained how discounted cash flow (DCF) analysis, a financial tool based on time-value-of-money concepts, is often used to evaluate incremental innovation projects. This appendix provides more information on DCF and how it can be directly calculated. It also introduces several related concepts, all of which are valuable in assessing the economic merits of innovations or new products:
- Net present value
- Internal rate of return
- Hurdle rate, discount rate, and the cost of capital
- Sensitivity analysis, a method that increases the practicality of these time-value tools
This material is adapted from Harvard Business Essentials: Finance for Managers, another volume in this series.
What Is Time Value?
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