Discounted cash flow & Net Present Value

Discounted cash flow & Net Present Value

One of the ways that professional investors are able to account for the time value of money is through a technique called discounted cash flow analysis.

And it’s a way of looking at the cash flows that come at different times in the future and discounting it back to what they are worth today, their net present value.

By doing that and looking at how money or the profits are always better when it comes earlier than later, it allows investors to evaluate the cash flows for different investment opportunities.

Where the cash flows come in, different amounts come in at different times.

It allows them to be able to compare different investment opportunities.  The present value of one future cash flow is equal to the future value divided by one, plus the discount rate raised to the time in years.

 

Present Value = Future value / (1+r)t

r= discount Rate per year

t= time of Future payment in years

if you have multiple cash flow values coming in at different

 

times in the future?

 

Well, the way we look at that then is that the net present value of all of the future cash flows is just the sum of all the net present values of each of those future values, minus your initial investment.