DISCOUNTED CASH

FLOW ANALYSIS
&
NET PRESENT
VALUE (NPV)
PRESENTED BY: GROUP 1
DISCOUNTED
CASH FLOW
ANALYSIS
DEFINITION, PURPOSE, & EXAMPLE
 What is a Discounted Cash Flow
Analysis?

- An analysis method used to value investment

by discounting the estimated future cash
flows.
- Applied to value a stock, company, project,
and many other assets or activities.
The cash received today is
more valuable than cash
received in the future.
CONCEPT OF DCF
 DISCOUNTED CASH FLOW ANALYSIS

Actual cash
generated by asset/
investment using
Value of NPV or IRR
investment
opportunity A DCF measures the value of
an asset based on the amount
of cash it can produce.
 PURPOSE OF
DISCOUNTED CASH
FLOW ANALYSIS
It attempts to figure out the value of investment
today based on the projections of how much money it
will generate in the future. With cash flow analysis,
business owners can better control financial
performance, such as reconsidering operating costs,
understanding the impact of debt, and where a
business could potentially grow.
 Examples of how discounted cash
flow (DCF) analysis can be used:

1. Evaluating investment opportunities: DCF analysis

can help the investors determine the value of potential
investments
2. Valuing companies: DCF analysis can also be used to
value companies by estimating the future cash flows
that the company is expected to generate and
discounting them to their present value.
3. Projecting capital expenditures: Such as building a new
facility or purchasing new equipment
4. Assessing bond values: Estimating the future cash
flows that the bond is expected to generate and
discounting them to their present value
 Problem
Let's say you are considering investing in a project that costs $25,000 upfront
and is expected to generate cash flows of $15,000 per year for the next 2 years.
You also have a required rate of return of 10%.
 01:
USE THE FORMULA
PV = CF1 / (1+r)^n + CF2 / (1+r)^n
Where PV is the present value, CF is the
cash flow for each year, r is the required
rate of return, and n is the number of years
 02:
COMPUTE
Year 1: PV = $15,000 / (1+0.1)^1
Year 1: PV = $15,000 / 1.1 = $13,636.36
 03:
COMPUTE
Year 2: PV = $15,000 / (1+0.1)^2
Year 2: PV = $15,000 / 1.21= $12,396.69
 04:
ADD IT ALL UP
$13,636.36 + $12,396.69
PV = $26,033.05
 Conclusion
Therefore, the present value of the cash flows from this project is $26,033.05
Since the initial investment was $25,000, the net present value (NPV) of the
project is $1,033.05, which means that the project is profitable and should be
considered for investment.
NET PRESENT
VALUE
(NPV)
DEFINITION, PURPOSE, & EXAMPLE
 WHAT IS NET PRESENT
VALUE (NPV)?
It is difference between the present value of cash inflows
and the present value of cash outflows over a period of
time. NPV is used in capital budgeting and investment
planning to analyze the profitability of a projected
investment or project.
 The idea behind NPV is to project all of the future cash inflows
and outflows associated with an investment, discount all those
future cash flows to the present day, and then add them together.
The resulting number after adding all the positive and negative
cash flows together is the investment’s NPV. In general, projects
with a positive NPV are worth undertaking while those with a
negative NPV are not.
NPV
 PURPOSE OF
NET PRESENT VALUE
(NPV)

NPV analysis is a form of intrinsic valuation and is used

extensively across finance and accounting for determining
the value of an investment security, capital project, new
venture, and anything that involves cash flow.
 PURPOSE OF
NET PRESENT VALUE
(NPV)
Determine the present value of future cash flows expected
to be generated by the investment, and compare it to the
initial cost of the investment.
 SAMPLE
COMPUTATIONS:
NET PRESENT VALUE
(NPV) FORMULA

Cashflow
NPV = (1 - i) t
- initial investment

where
i = required return or discount rate
t = number of time periods
Company A wanted to know their net present value of cash flow if they
invest 100,000 today. Their initial investment in the project is 80,000 for
the 3 years of time, and they are expecting the rate of return is 10%
yearly. From the above available information, calculate the NPV.
Solution:
Cashflow
NPV = (1 - i) t
- initial investment

= 100,000 / (1-0.10)^3 - 80,000

= 137,174.21 - 80,000
= 57, 174.21

In this example, NPV is positive, so we can accept the project.

Smart Manufacturing Company is planning to reduce its labor costs by
automating a critical task that is currently performed manually. The
automation requires the installation of a new machine which would cost
$15,000 to purchase and install. This new machine can reduce annual
labor cost by $4,200 and has a useful life of approximately 15 years. The
salvage value of the machine after fifteen years will be zero. The
required rate of return of Smart Manufacturing Company is 25%.
Should Smart Manufacturing Company purchase the new machine if
evaluated using an NPV method?
 Initial cost $15,000
Life of the project 15 years
Annual cost savings $4,200
Salvage value 0
Required rate of return 25%

Solution:
PV = amount of cash flow x 25% Factor
NPV = PV - initial investment
A project requires an initial investment of $225,000 and is expected to
generate the following net cash inflows over its four years life:
Year 1: $95,000
Year 2: $80,000
Year 3: $60,000
Year 4: $55,000

Required: Compute net present value of the project if the minimum desired rate of
return is 12%.
Solution:
Group 1 members:
● Mark James Ian Abrenica
● Ashley Agcaoili
● Cyree Aquino
● Gaibrielle Rayn Asuncion
● Jevanie Castroverde
● Sarah Joyce Corpuz
● Carla Justine Cayaban
● Renalyn Davasol
● Andrei Carl Edang
● Julianne Eusebio
● Pamela Mae Quejano
 Sources
NPV Examples:
https://www.accountingformanagement.org/net-present-value-method/