If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?
What will be an ideal response?
Answer: Cash flows occurring at different points in time cannot be added because a dollar today is worth more than a dollar tomorrow. In other words, these cash flows are not in the same units. The compounding and discounting effect causes these cash flows to be different across time. However, this is only valid for nonzero interest rates. Hence, the implied assumption in adding cash flows across time is that interest rate is zero.
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