ABSTRACT
Discounted Cash Flow (DCF) is an aid to the valuation or analysis of any investment producing a cash flow. In its general form, it has two standard products — NPV and IRR.
Net present value (NPV) Future net benefits receivable from the investment are discounted at a given ‘target rate’. The sum of the discounted benefits is found and the initial cost of the investment deducted from this sum, to leave what is termed the net present value of the investment, which may be positive or negative. A positive NPV implies that a rate of return greater than the target rate is being yielded by the investment; a negative NPV implies that the yield is at a rate of return lower than the target rate. The target rate is the minimum rate which the investor requires in order to make the investment worth while, taking into account the risk involved and all other relevant factors. It will be governed in particular by one factor: the investor’s cost of capital.
