Background Note | HBS Case Collection | June 2002

Note on the Equivalency of Methods for Discounting Cash Flows

by William E. Fruhan Jr.

Abstract

Uses a numerical example to demonstrate that when you discount the cash flows to capital from a project at the weighted average cost of capital, you get same net present value result as you obtain when discounting the cash flows to equity at the cost of equity. Also demonstrates why it is far easier to do a net present value calculation using the weighted average cost of capital (assuming a fixed debt ratio and market value weights) than it is to do the same calculation using the cost of equity.

Keywords: Capital Structure; Cash Flow; Cost of Capital; Equity; Valuation;

Citation:

Fruhan, William E., Jr. "Note on the Equivalency of Methods for Discounting Cash Flows." Harvard Business School Background Note 202-128, June 2002.