Discounted Cash Flow

The time value of money is calculated using discounting equations. The Present Value of $1 cash flow PV = 1/(1+i)N. N = number of periods, i = the interest rate or discounting rate.

Discounted cash flow is the arithmetic method applied that brings all cash flows to their net present value now.

Download the worked example Excel file for a discounting cash flow table.

Calculation example:

Year Cash Flow Discount factor Present Value
0 -10,000 (1+0.08)0 = -10,000 - 10,000.00
1 +3,500 (1+0.08)1 = +3,500 x 0.92593 + 3,240.74
2 +4,000 (1+0.08)2 = +4,000 x 0.85734 + 3,429.35
3 +5,000 (1+0.08)3 = +5,000 x 0.79383 + 3,969.16
4 +7,000 (1+0.08)4 = + 7,000 x 0.73503 + 5,145.21

Actual Cash Flow = 9,500
Discounted cash flow = 5,784.47

Use the Terminal Value calculation download file to work out the value of cash flows beyond the plan.

The discounted cash flow method is also used to calculate the Internal rate of return.

Software Links

Investment-Calc For Excel

Download Files

Discounted Cash Flow

Terminal Valuation Calculator

Reference Pages

Discount Rate

Discounted Pay Back Period

NPV

NPV Rule

Terminal Valuation

Internal Rate of Return