Choosing wisely: investment

appraisal

1
Discounted Cash Flow Techniques

Traditional methods do not take into account the time

value of money.
eg £1000 now is worth more than £1000 in one year’s
time.

£1000 in one year’s time can be discounted back to

the present, to give its Present Value (NPV)

2
 Present Value (PV)
Calculation of PV is the converse of using
Compound Interest principle.
Compounding formula
n
 r 
Pn  P 0 1  
 100 
where Po is the initial value of investment in year
0, Pn is the value in year n
PV formula
1 Discount
P0  Pn  n factor
 r 
1  
 100 
PV 3
 Calculation of PV
E.g. You will receive £1000 in 3 years time. Using
5% discount (or interest) rate, the PV of this is

Discount
= 1000 x _1___ factor

1.053
= 1000 x 0.8638
= £863

Thus, £1000 in 3 years time at an interest rate of

5% is worth £863 now 4