Discounted Cash Flow is a Technique usually used in estimating Cost while project selection.
This will compare the value of the future cash flows of the project to today’s dollors using time value of money techniques.
Discounted Cash flow is calculated and compared against selection of projects. Use PV formula to the considered projects and compare discounted cash flows of all projects against each other to make a decision in selection process.
Lets us discuss with an example:
Project X is expected to make $50,000 in two years. Project Y is expected to make to $80,000 in three years. If the cost of capital is 5 percent, which project to choose?
Using PV formula, PV = FV / (1 + i) n , PV for Project X is $69,107 and Project Y is $45,351.
Project Y will return the highest investment to the company and should be chosen over Project X.
-Posted by Sundar
Posted by Sundar 