DCF

Discounted Cash Flow

 Discounted Cash Flow
Principle
• DCF – method of analysing future income and
revenue streams.
• Discount these back to Present Value, using
Time Value of Money principles.
• Basically, take the period usually yearly, might
be quarterly or monthly
• Subtract money going out from money coming
in
• Result is net cash flow for that period.
 Net Cash Flow
• Net cash flow for each period may be positive
or negative
• Discount that back to Present Value
• Add up the totals
• = Net Present Value
 DCF Example
• University FM department considering building
student residences to let.
• Income from residences against expenditure on;
– repairs,
– insurance,
– management,
– energy,
– etc.
• For following example, all expenditure
aggregated together.
 DCF Example
Discount
Student Residences 5%
rate
Net Cash- Discount Present
Period Item Income Item Expenditure
Flow Factor Value

1 Purchase 500,000 -500000 -500,000

2 Rent 96,000 Maintenance 3,000 93,000 0.952381 88,571
3 Rent 96,000 Maintenance 5,000 91,000 0.907029 82,540
4 Rent 96,000 Maintenance 5,000 91,000 0.863838 78,609
5 Rent 96,000 Maintenance 7,000 89,000 0.822702 73,221
6 Rent 96,000 Maintenance 9,000 87,000 0.783526 68,167
6 Refurb 25,000
7 Rent 96,000 Maintenance 5,000 91,000 0.746215 67,906
8 Rent 96,000 Maintenance 5,000 91,000 0.710681 64,672
9 Rent 96,000 Maintenance 5,000 91,000 0.676839 61,592
10 Rent 96,000 Maintenance 5,000 91,000 0.644609 58,659
11 Rent 96,000 Maintenance 7,000 89,000 0.613913 54,638
12 Rent 96,000 Maintenance 7,000 89,000 0.584679 52,036
13 Rent 96,000 Maintenance 7,000 89,000 0.556837 49,559
14 Rent 96,000 Maintenance 7,000 89,000 0.530321 47,199
15 Rent 96,000 Maintenance 7,000 89,000 0.505068 44,951
16 Rent 96,000 Maintenance 8,000 88,000 0.481017 42,330
17 Rent 96,000 Maintenance 8,000 88,000 0.458112 40,314
18 Rent 96,000 Maintenance 8,000 88,000 0.436297 38,394
19 Rent 96,000 Maintenance 8,000 88,000 0.415521 36,566
20 Rent 96,000 Maintenance 8,000 88,000 0.395734 34,825

Net Present
584,748
Value
 DCF NPV Points To Note
• Can allow for future known or predicted
expenditure.
• Difficulties in
• Variable costs e.g. will energy costs remain
constant in real terms over the period?
• How realistic is the discount rate?
Thank you for your attention.