There are three characteristics that we need to know about a project's cash flows in order...

There are three characteristics that we need to know about a project's cash flows in order to properly value them (correctly calculate the present value). Name the three things, and briefly explain why we need to know each characteristic.

Expert Solution

There are three characteristics that we need to know about a project's cash flows in order to properly value them (correctly calculate the present value). They are:

The quantum of cash flows: What is the value of the cash flow that we the need the present value of? So, we need to quantify the actual and relevant cash flows that need to be discounted. This can be, say for example, an after tax free cash flow, or dividend or any other payment.
The time of occurence of cash flows: When will the cash flow occur in time? This helps us to calculate the discount period. This tells us how far the cash flow is from today and it plays a role in determining the discount factor.
The required rate of return: What should be the appropriate discount rate? What should be the rate used for discounting the cash flows. This also helps us determine the discount factor.

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