1. Money

Discounted Cash Flow Analysis

From , former About.com Guide

Definition:

Discounted cash flow analysis is a method for introducing time and risk into the analysis of the cash flows from an investment project. That investment project could be a financial investment like a bond or shares of stock or it could be a piece of equipment or a building.

Common sense tells us that cash flows a company anticipates receiving in the future from an investment project are not worth as much right now as their stated future worth because we don't have them now. We have to, somehow, discount them back to the present to see what they are worth to us now. This is called the present value of future cash flows.

On the other hand, if a company invests its cash into a savings or money market account, the value of the cash flows from that investment will increase in the future because of the interest paid on the interest. This is called the future value of cash flows.

Interest rates and time both have an effect on the value of cash flows to a company in the present. This is why companies must use discounted cash flow analysis in order to determine the actual value of cash flows in the present from investment projects.

Also Known As: time value of money; present value of cash flows; future value of cash flows; cash flow analysis
Examples:
XYZ, Inc. chose to invest in a piece of equipment for their manufacturing process because discounted cash flow analysis showed a positive present value of cash flows.

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