Discounted Cash Flow

In modern finance, time value of money concepts play a key  role in decision making. When investment projections or business case results extends for  more than a year into the future, Trained professionals in finance usually want to see cash flows presented in two forms, in discounted terms and in non discounted terms. They want to see projections, that is, that consider the time value of money.

For understanding this concept we  need to know below terms

• Present value (PV) is what the future cash flow is worth today.i.e What future money is worth today is called its present value.
• Futue value (FV) is the value, in non discounted currency units that actually flows in or out at the future time.i.e what money will be worth in the future when it finally arrives is called  future value.

 for example, you have a present value today of about Rs.95, while its future value is will be  Rs.100.

§  Net present value (NPV) = Future value of Money less total discounted value.

§  The longer the time period before an actual cash flow event occurs, the more the present value of future money is discounted below its future value.

§  As the number of discounting periods between now and the cash arrival increases, the present value of money decreases.

§  As the discount rate in the present value calculations increases, the present value decreases.

Mathematical formula of NPV & DCF:

Wrongly written as PV = future value. Please read this as Present value.