dcf - an explanation of discounted cash flow
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DCF
DCFDiscounted Cash Flow
Discounted Cash FlowPrincipleDCF 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 monthlySubtract money going out from money coming inResult is net cash flow for that period.
Net Cash FlowNet cash flow for each period may be positive or negativeDiscount that back to Present ValueAdd up the totals= Net Present Value
DCF ExampleUniversity 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 ExampleStudent ResidencesDiscount rate5%PeriodItemIncomeItemExpenditureNet Cash-FlowDiscount FactorPresent Value1Purchase500,000-500000 -500,0002Rent96,000Maintenance3,00093,000 0.95238188,5713Rent96,000Maintenance5,00091,000 0.90702982,5404Rent96,000Maintenance5,00091,000 0.86383878,6095Rent96,000Maintenance7,00089,000 0.82270273,2216Rent96,000Maintenance9,00087,000 0.78352668,1676Refurb25,0007Rent96,000Maintenance5,00091,000 0.74621567,9068Rent96,000Maintenance5,00091,000 0.71068164,6729Rent96,000Maintenance5,00091,000 0.67683961,59210Rent96,000Maintenance5,00091,000 0.64460958,65911Rent96,000Maintenance7,00089,000 0.61391354,63812Rent96,000Maintenance7,00089,000 0.58467952,03613Rent96,000Maintenance7,00089,000 0.55683749,55914Rent96,000Maintenance7,00089,000 0.53032147,19915Rent96,000Maintenance7,00089,000 0.50506844,95116Rent96,000Maintenance8,00088,000 0.48101742,33017Rent96,000Maintenance8,00088,000 0.45811240,31418Rent96,000Maintenance8,00088,000 0.43629738,39419Rent96,000Maintenance8,00088,000 0.41552136,56620Rent96,000Maintenance8,00088,000 0.39573434,825Net Present Value584,748
DCF NPV Points To NoteCan allow for future known or predicted expenditure.Difficulties inVariable 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.