Time Weighted versus Nominal Cash Flows

Very few projects with long lifetimes generate earnings or cash flows evenly over their life. In sectors with huge investments in infra structure, such as telecommunications, the earnings and cash flows might be negative for an extended period (say ten to twenty years) before they turn positive. In other sectors, the earnings may occur earlier in time. Whatever the reason for the unevenness of cash flows, a basic question that has to be addressed when measuring returns is whether they should reflect the timing of the earnings or cash flows. We will argue that they should, with earlier earnings and cash flows being weighted more than earnings and cash flows later in a project life.

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