DISCOUNTED
CASHFLOW
DISCOUNTED CASHFLOW
Discounted cash flow (DCF) refers to a valuation method
that estimates the value of an investment using its expected
future cash flows.
DCF analysis attempts to determine the
value of an investment today, based on projections of how
much money that investment will generate in the future.
HOW DOES DISCOUNTED
CASH FLOW (DCF) WORK?
The purpose of DCF analysis is to estimate the money an investor would receive from an
investment, adjusted for the time value of money.
The time value of money assumes that a Peso that you have today is worth more than a Peso
that you receive tomorrow because it can be invested.
As such, a DCF analysis is useful in any situation where a person is paying money in the
present with expectations of receiving more money in the future.
Discounted cash flow analysis finds the present value of expected future cash flows using a
discount rate.
Investors can use the concept of the present value of money to determine whether the future cash flows
of an investment or project are greater than the value of the initial investment.
IN DISCOUNTING
PV FV
455 500
A YEAR
LATER
FORMULA
1
PV = FV
( 1+r) n
r rate
n number or years
1
500 x
(1 + .10 )n
PV 455
INVESTMENT DECISION
NET PRESENT VALUE technique is a discounted cash
flow method that consider Time Value of money in
evaluating capital investment.
It is a method in calculating the present value of cash flows
( inflows and outflows) of an investment proposal using the
cost of capital as an appropriate discounting rate.
INVESTMENT DECISION
SAMPLE FORMAT
DISCOUNTING PRESENT
YEAR CASH FLOWS
FACTOR VALUE
0
1
2
3
NPV XXXXX
INVESTMENT DECISION
SAMPLE FORMAT
DECISION RULE
IF NPV 0 ACCEPT
IF NPV 0 REJECT
INVESTMENT DECISION
SAMPLE ACTIVITY
Calculate NVP of the two project and suggest which of the two project should be accepted
assuming discount rate @ 10%.
Project X Project Y
Initial investment 40,000.00 60,000.00
Estimated life 5 years 5 years
Scrap value 2,000.00 4,000.00
INVESTMENT DECISION
SAMPLE ACTIVITY
Cash in Flows
YEAR 1 2 3 4 5
PROJECT X 10,000 20,000 20,000 6,000 4,000
PROJECT Y 40,000 20,000 10,000 6,000 4,000
PV FACTOR A@ 10% DISCOUNT
YEAR 1 2 3 4 5
PV FACTOR @ 10% 0.909 0.826 0.751 0.683 0.621
INVESTMENT DECISION
SAMPLE ACTIVITY
PROJECT X
DISCOUNTING PRESENT
YEAR CASH FLOWS
FACTOR @ 10% VALUE
0 -40,000.00 1 -40,000.00
1 10,000 0.909 9,090.00
2 20,000 0.826 16,520.00
3 20,000 0.751 15,020.00
4 6,000 0.683 4,098.00
5 4,000 0.621 2,484.00
SCRAP (5) 2,000 0.621 1,242.00
NVP 8,454.00
INVESTMENT DECISION
SAMPLE ACTIVITY
Lets compute Project Y
PROJECT Y
DISCOUNTING PRESENT
YEAR CASH FLOWS
FACTOR @ 10% VALUE
0 -60,000.00 1 -60,000.00
1 40,000 0.909
2 20,000 0.826
3 10,000 0.751
4 6,000 0.683
5 4,000 0.621
SCRAP (5) 4,000 0.621
NVP -60,000.00
INVESTMENT DECISION
SAMPLE ACTIVITY
PROJECT Y (ANSWER)
PROJECT Y
DISCOUNTING PRESENT
YEAR CASH FLOWS
FACTOR @ 10% VALUE
0 -60,000.00 1 -60,000.00
1 40,000 0.909 36,360.00
2 20,000 0.826 16,520.00
3 10,000 0.751 7,510.00
4 6,000 0.683 4,098.00
5 4,000 0.621 2,484.00
SCRAP (5) 4,000 0.621 2,484.00
NVP 9,456.00
INVESTMENT DECISION
(COMPARE PROJECT X AND Y) WHICH DO YOU WANT TO
INVEST?
PROJECT Y PROJECT X
YEAR CASH FLOWS DISCOUNTING PRESENT YEAR CASH FLOWS DISCOUNTING PRESENT
FACTOR @ 10% VALUE FACTOR @ 10% VALUE
0 -60,000.00 1 -60,000.00 0 -40,000.00 1 -40,000.00
1 40,000 0.909 36,360.00 1 10,000 0.909 9,090.00
2 20,000 0.826 16,520.00 2 20,000 0.826 16,520.00
3 10,000 0.751 7,510.00 3 20,000 0.751 15,020.00
4 6,000 0.683 4,098.00 4 6,000 0.683 4,098.00
5 4,000 0.621 2,484.00 5 4,000 0.621 2,484.00
SCRAP (5) 4,000 0.621 2,484.00 SCRAP (5) 2,000 0.621 1,242.00
NVP 9,456.00 NVP 8,454.00
