Investment Appraisal – Discounted
Cash Flow (NPV)
3.3 Decision-making techniques
What you need to know
• c) Discounted Cash Flow (Net Present Value only)
Concept links
NPV
What is Investment Appraisal?
Three Main Methods of Investment Appraisal
Payback Period
Average Rate of Return
Discounted Cash Flow (NPV)
The Results of Each Method…
Are Measured in
Payback
Period
Average Rate
of Return
(ARR)
Discounted
Cash Flow
(NPV)
Net Present Value
What is Discounting?
The Time Value of Money
• Better to receive cash now rather than in the
__________
• Future cash flows are worth ________
• Use _______________to bring cash flows
back to their ___________________
• Relevant discount factor determined by
required _________________________
Calculating the Present Value of a
Future Cash Flow
X
=
For Example
Cash Flow
£20,000
=
X
Discount
Factor
0.9
Present Value
£20,000 x 0.9 =
Example of Calculating NPV
Net present
value
calculates the
_____________
_____________
_______of a
project’s future
cash flows
Add together
all the Present
Values of
Future Cash
Flows
The NPV Decision
Accept the
Project
Reject the
Project
Investment Project NPV
Year
Cash
Flows
Net
Flow
Discount
Factor
(100,000)
1
0
Investment
1
Project Profits
40,000
0.91
2
Project Profits
50,000
0.83
3
Project Profits
60,000
0.76
Total
50,000
Present
Value
Benefits of Using NPV…
Drawbacks of Using NPV…