Palisade Corporation Cash Flow Example Model

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) calculations are a frequent example of the use of @RISK. In the model below, the
sources of risk are the revenue growth rate and the variable costs as a percentage of sales. After taking into
account the assumed investment, and applying a discount factor, the DCF is derived. Following the simulation, the
average (mean) of the DCF is known as the net present value (NPV). In this example, the results show that the
average DCF is positive (about 40), whereas the probability of a negative DCF is about 15%. The decision as to
whether to proceed or not with this project will therefore depend on the risk perspective (tolerance) of the decision-
maker.

This example has also been extended to calculate the distribution of bonus payments on the assumption that a
bonus is paid whenever the net DCF is larger than a fixed amount (such as 50). It also uses some of the @RISK
Statistics functions (RiskMean, RiskTarget, RiskTargetD) to work out the average net DCF, the probability that the
net DCF is negative and the probability that a bonus is paid.

1 2 3 4 5 6 7 8 9 10
Revenue 100 #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
% growth rate #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
average 5% 5% 5% 5% 5% 5% 5% 5% 5%
volatility 8% 8% 8% 8% 8% 8% 8% 8% 8%

Fixed Cost 35 35 35 35 35 35 35 35 35 35
Variable Cost #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
Variable Cost % #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?
min 48% 48% 48% 48% 48% 48% 48% 48% 48% 48%
ml 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%
max 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%

Profit/Cash Flow #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN? #ADDIN?

DCF 12% #ADDIN?

Investment 100
Net DCF (NPV) #ADDIN? Average #ADDIN?
p(<=0) #ADDIN?
Bonus limit 50
 Palisade Corporation Cash Flow Example Model

Bonus #ADDIN? p(>0) #ADDIN?