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Optimal Switching Between Cash-Flow Streams

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Discounted cash flow

The discounted cash flow (DCF) analysis, in finance, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management, and patent valuation. Used in industry as early as the 1700s or 1800s, it was widely discussed in financial economics in the 1960s, and U.S. courts began employing the concept in the 1980s and 1990s.

Valuation using discounted cash flows

Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. The cash flows are made up of those within the “explicit” forecast period, together with a continuing or terminal value that represents the cash flow stream after the forecast period. In several contexts, DCF valuation is referred to as the "income approach".

Internal rate of return

Internal rate of return (IRR) is a method of quantifying the merits of a project or investment opportunity. The calculation is termed internal because it depends only on the cash flows of the investment being analyzed and excludes external factors, such as returns available elsewhere, the risk-free rate, inflation, the cost of capital, or financial risk. The method may be applied either ex-post or ex-ante. Applied ex-ante, the IRR is an estimate of a future annual rate of return.

Time value of money

The time value of money is the widely accepted conjecture that there is greater benefit to receiving a sum of money now rather than an identical sum later. It may be seen as an implication of the later-developed concept of time preference. The time value of money is among the factors considered when weighing the opportunity costs of spending rather than saving or investing money. As such, it is among the reasons why interest is paid or earned: interest, whether it is on a bank deposit or debt, compensates the depositor or lender for the loss of their use of their money.

Present value

In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has interest-earning potential, a characteristic referred to as the time value of money, except during times of zero- or negative interest rates, when the present value will be equal or more than the future value. Time value can be described with the simplified phrase, "A dollar today is worth more than a dollar tomorrow".

Multilayer switch

A multilayer switch (MLS) is a computer networking device that switches on OSI layer 2 like an ordinary network switch and provides extra functions on higher OSI layers. The MLS was invented by engineers at Digital Equipment Corporation. Switching technologies are crucial to network design, as they allow traffic to be sent only where it is needed in most cases, using fast, hardware-based methods. Switching uses different kinds of network switches. A standard switch is known as a layer 2 switch and is commonly found in nearly any LAN.

Multiprotocol Label Switching

Multiprotocol Label Switching (MPLS) is a routing technique in telecommunications networks that directs data from one node to the next based on labels rather than network addresses. Whereas network addresses identify endpoints the labels identify established paths between endpoints. MPLS can encapsulate packets of various network protocols, hence the multiprotocol component of the name. MPLS supports a range of access technologies, including T1/E1, ATM, Frame Relay, and DSL. In an MPLS network, labels are assigned to data packets.

Switch

In electrical engineering, a switch is an electrical component that can disconnect or connect the conducting path in an electrical circuit, interrupting the electric current or diverting it from one conductor to another. The most common type of switch is an electromechanical device consisting of one or more sets of movable electrical contacts connected to external circuits. When a pair of contacts is touching current can pass between them, while when the contacts are separated no current can flow.

Terminal value (finance)

In finance, the terminal value (also known as “continuing value” or “horizon value” or "TV") of a security is the present value at a future point in time of all future cash flows when we expect stable growth rate forever. It is most often used in multi-stage discounted cash flow analysis, and allows for the limitation of cash flow projections to a several-year period; see Forecast period (finance).

Valuation (finance)

In finance, valuation is the process of determining the value of a (potential) investment, asset, or security. Generally, there are three approaches taken, namely discounted cashflow valuation, relative valuation, and contingent claim valuation. Valuations can be done for assets (for example, investments in marketable securities such as companies' shares and related rights, business enterprises, or intangible assets such as patents, data and trademarks) or for liabilities (e.g., bonds issued by a company).