For the analysis of investment performance used two groups of indicators: given the time factor and without. Discounted cash flow is a temporary measure, because it takes into account each cash flow at the company, which allows you to more accurately follow the dynamics of costs and profits.
Discounting cash flow is the reduction of cash flow taking into account the time value of money to the current day, i.e. at the beginning of the investment. This allows to take into account all factors affecting cash flow, including inflation and risk.
The formula for discounted cash flow as follows:DP = CDP/(1 + r)^i where:DDP – discounted cash flow time period i;CDP – net cash flow during the same period;r – discount rate in decimal form.
Net cash flow is defined as the difference between the incoming values and costs of the enterprise for the period, calculated taking into account taxes, dividends and other payments.
After the calculation of discounted cash flows for each time period calculated net present value of the stream that is equal to the sum of these variables and net cash flow at period zero, the time of the first investment in the project:CDP = ЧДП_0 + ЧДП_1/(1 + r) + ЧДП_2/(1 + r)2 + ... + CDPP/(1 + r)^n = ∑CDP/(1 + r)^i, with 1 ≤ i ≤ n.
An important aspect of the proper conduct of discounting is the discount rate. For this there are several methods: a method of evaluating long-term assets, weighted average cost of capital, the cumulative build. The latter approach is used most often, it is based on expert risk assessment.
The method of analysis of investments by calculating discounted cash flow is effective, but labor-intensive means. The result of this indicator depends on how precise and full account of all the cash flows at the company during the reporting period.
The question arises how to account for the inflationary component. This can be done in two ways: during direct discounting when calculating the rate, or by deflating the cash flows in the periods of their registration. In the second method the movement of funds is recorded, adjusted for the inflation factor as they arise.
Advice 2 : How to determine the rate of discount
The norm of discount is a level of profitability that wish to have the investor in investment funds. It can help to determine how much you must pay today to obtain the necessary amount in the future.
You will need
- - knowledge of financial analysis.
The norm of discount is used in the evaluation of the effectiveness of investments. Key decisions when choosing an investment project depends directly on the selected values.
For the different calculation steps can be selected different values of the bet cast. This is acceptable in cases of the changing dynamics of risk, amount of debt capital structure.
The impact of a large number of factors makes it difficult to offer a universal selection method indicator. In any case, it needs to reflect the return on capital employed, adjusted for inflation, and alternative available to the investor the risk-free areas of investment.
From a technical point of view, the discount rate can be defined as the interest rate, the basis for determining the market value of the business. The calculation depends on which type of cash flow is used to estimate as a base.
The calculation can be used: the rate of inflation, weighted average cost of capital, valuations, refinancing rate, the profitability of the alternative project, the rate of Bank interest on loans or deposits.
Often capital raising is carried out through several sources. In this case, use the average weighted cost of capital. It is calculated as follows: WACC=∑_(i=1)^n▒〖Di×Ei〗n = number of types of capital;E = rate of discount of the i – th capital;Di = proportion of the i-th capital in total capital.
It is very important to most accurately determine the rate of discount for this direction of investment. This directly affects the amount of income that will result from the investments.